Chunghwa Telecom Co Ltd (CHT) 2006 Q1 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company’s first quarter 2006 operational results. During the presentation all lines will be on listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question and the answer session. Now I would like to turn it over to President Lu, the host of conference. Thank you. President Lu, please go ahead.

Good evening everyone. This is Shyue-ching Lu, President of Chungwha Telecom. I would like to thank you all for joining our first quarter 2006 earnings results call. Since Chairman Ho Chen is not available today, I will take you through the presentation. Following that, I will be happy to answer your questions.

For our standard Safe Harbor policy, please refer to our website at www.cht.com.tw. Additionally, all of our financial results and discussions today are based on U.S. GAAP. Financial statements in both U.S. GAAP and ROC GAAP are also available on our website. Please also note that the Taiwan SFB requires us to make a monthly announcement of our revenues which is only available in ROC GAAP.

Before entering into our operating results, I would like to report to you the Company’s achievement of share buybacks and early retirement programs. And awards that we won as Reader’s Digest Trusted Brand in 2006 rewards.

In order to return excess cash to investors, Chungwha Telecom conducted a share buyback program from February 10 to April 9, and repurchased 192m common shares on the open market, representing 1.99% of our total outstanding shares. As a result, the Company’s common share price increased from TWD55.2 to TWD61.3, while the ADR price increased from $18.01 to $20.60 till the end of last week.

We provided an early retirement program in March. 1,929 employees took part in the program and left the Company. The headcount reduction is expected to save personnel costs of TWD3.22b per year starting in 2007. We will continue to provide early retirement programs as necessary in the future to reduce headcount and save related personnel expenses. Additionally we will recruit around 600 new employees this year, whose salaries are expected to be lower than those who left.

In 2006 Reader’s Digest Asia Trusted Brand, Chunghwa Telecom won the platinum award in the category of telecom companies, and the gold award in mobile service providers. The Company has been awarded the platinum award for three consecutive years, attributed to our quality network and the customer base -- customer service. We would like to share congratulations and honors to all of our investors.

Now let me start with the financial results of the first quarter of ’06. If you are following the presentation slides, I will start on slide five. Total revenue for the first quarter of ’06 was TWD45b, a 1.1% increase year-over-year. The increase in revenue was mainly driven by continued growth in the mobile and the Internet and data businesses. However, our net income decreased fairly significantly by 22.8% year-over-year.

This was mainly due to a one-time compensation expense relating to the early retirement program that we conducted from March 1 to March 31. The compensation expense related to the early retirement program totaled TWD2.3b. TWD2.2b of this amount was recognized as an operating expense in the first quarter ’06. While the compensation expense resulted in a temporary decline in net income, the headcount reduction is expected to benefit our operations as personnel costs and expenses will decrease accordingly.

Now on segmental revenue under U.S. GAAP. If we compare the results for the first quarter ’06 and the first quarter ’05, Internet and data revenue increased 11.9% and 7% respectively, proving once again to be a significant outlet of growth within our Company. Internet revenue increased because our ADSL subscriber numbers are continuing to increase, and our strategy to upgrade customers from lower speed to higher speed was incremented successfully.

Mobile service reported 3.1% growth. It was mainly due to the increase in post-paid subscriber numbers. In the fixed line business local revenue decreased by 7%, mainly due to mobile and broadband substitution. DLD revenue decreased 8.6%. However, the revenue decreased by 6.7% compared to the first quarter ’05 because of a decrease in average user fee due to various promotions.

On slide seven you can see that our growth areas continue to account for a larger proportion of total revenue. Comparing the revenue composition from the first quarter of ’06 with the same period in ’05, Internet and data revenue increased from 23% to 25% of our total revenues, while mobile revenue increased from 39% to 40%. We expect this trend to continue.

Moving on to page nine, CapEx for the first quarter amounted to TWD6.27b, which was 19% year-over-year increase over the first quarter ’05. The main reason for the increase is on the CapEx spending on 3G which amounts to TWD1.85b. Our cash flow from operations remains strong and reached TWD18.9b for the first quarter of ’06, compared to TWD17.3b for the same period in ’05. As of March 31, ’06, our free cash flow from operating activities totaled TWD12.6b.

Next let’s move on, business review.

Let’s start with the Internet and data business on slide 12. ADSL subscribers totaled 3.76m as of March 31, 2006, which was a robust 17.5% year-over-year increase. The number of subscribers for 2 megabits per second and higher speeds accounted for 67% of our total ADSL subscriber base, compared to 57.3% back in March of 2005. Our ADSL ARPU for the first quarter ’06 was TWD751 per month, compared to TWD797 in the first quarter last year.

The decrease in ARPU was due to our promotion of 256 [kilobits] per second package and the discount loyalty program. However, the Company continues to upgrade subscribers from lower speed to higher speed, which should help to mitigate the decrease in ARPU. We continue to maintain a commanding position in the Taiwan broadband market, with a market share of 86%. Furthermore, about 80% of our ADSL subscribers use our HiNet higher speed service.

We have also been aggressively promoting our 2 megabits per second, 8 megabits per second service. On this page we show that the average bandwidth per user was 2.26 megabits per second, as of the end of March ’06, which was an increase of 29% compared to March ’05. Moreover, the total revenue from ADSL access service for first quarter ’06 increased to TWD4.4b, compared to TWD3.8b in the first quarter ’05. This was primarily a result of our [sustained] effort to migrate customers to higher speed, and the increase in subscriber numbers.

On slide 14 you will see that for IPTV service, our target for the year end ’06 is to accumulate 250,000 subscribers. At the moment we offer differentiated and [indirect] financial, educational and [collaborative] programs that are not available on cable TV. The total number of on-demand programs that we -- are available has reached over 1,600. Additially we intend to offer bundled ADSL, [MOD] and [inaudible] service, together with various headphone services including wireless [inaudible], [POC] and others.

Now moving on to our mobile business on slide 15. At the end of March ’06 our total number of 2G and 3G subscribers was 8.2m. For 2G service our subscriber market share is 39.9%. Customers have particularly valued our seamless coverage, high quality network, accurate 3G systems and the competitive promotional packages. Pre-paid customers accounted for 7.1% of our total mobile customers, and the number of post-paid customers increased 4.3% year-over-year.

According to the National Communications Commission and our internal statistics, Chunghwa Telecom has been a beneficiary of mobile number portability. Almost 15% of [NMP] applicants switched to Chunghwa Telecom. Our [excellent] service proves to be particular effective in facing NMP competition.

Mobile VAS remains a primary focus for Chunghwa Telecom. As you can see on slide 16, mobile VAS revenue for the first quarter ‘06 was 40.8% higher than in the first quarter ’05, with mobile Internet service experienced the highest growth. Our blended ARPU was TWD731 for the first quarter of ’06 ,which increased 3.1% compared to the first quarter ’05. The AMPU in the first quarter ’06 increased 4.4% year-over-year.

We are also happy to report that our blended churn rate for the first quarter ’06 decreased from 4.1% to 3.4%. In addition the churn rate for post-paid subscribers was only 2.7%.

Currently the average monthly fee from 3G subscribers is two times that of 2G subscribers, while 3G ARPU is 75% higher than that of 2G. The VAS ARPU for 3G post-paid subscribers is 27% higher than that of 2G post-paid subscribers. By the end of March 2006, 21% of 3G subscribers were using 3G handsets, while only 10 to 12% of 3G subscribers were using 3G handsets at the end of last year. Among all of 3G subscribers, 83% migrated from our 2G services which we believe is a very solid migration record.

Finally, moving on to the fixed line business on slide 19. Total fixed line revenue for the first quarter ’06 declined by 7.2% to TWD15.36b. Mainly due to the effect of mobile substitution, the continuous migration of dial-up subscribers to ADSL broadband service and fixed line competition. We have seen some early signs that this downward trend of fixed line revenue has been stabilizing.

For international long distance calls traffic continue to grow, which is fairly remarkable given the overall situation of the market. However, the outgoing traffic did increase 3.7% in the first quarter ’06 compared to last year.

Going forward, Chunghwa Telecom’s strategy is very clear. We continue to focus on our core businesses. For the Internet and data business, we aim to add 500,000 ADSL subscribers by the end of 2006. Moreover, we are providing a bundled service ADSL plus wireless Internet, and initiated a FTTH service with speed of 50 megabits and 100 megabits per second to cater to customers’ needs.

On the mobile service front, we expect to increase 500,000 3G subscribers by the end of 2006, and we will continue to drive adoption of value added services and 3G services. Currently we are co-operating with local handset manufacturers, and will offer core brand handsets in the near future. We are still working on planning the adoption of IP based [NGN] and the services to be offered. We aim to maintain our market share, due to our quality network and quality services.

That concludes my presentation. I would like to take this moment to thank you all again for participating in this call. I would be happy to take your questions now. Thank you.

Now we are going to the question and the answer session. [OPERATOR INSTRUCTIONS]. Go ahead please.

Yes, hi. Good evening President Lu. Thank you so much for the call. My name is Anand Ramachandran. I'm calling from Citigroup in Hong Kong. I have three questions. Firstly, on the share buyback. The number that you’ve indicated, 192m, is slightly lower than what you planned with your 250m. Could I check why? And could I also follow up on what’s required in terms of approval or timing for the cancellation of these shares? That’s question number one.

Question two is on the employee retirement program. Over the year end results you had indicated that you'd expect this charge, this TWD2.2b, to be offset by the cost savings that come through from the employees who've left for this year. Is that still correct?

And my last question would be on your guidance, and I appreciate that Chunghwa Telecom management has always been probably conservative in that. Is this what's showing through in your 2006 forecast as well, or is there any specific cost item that we should be aware of, as to why you're looking at net income declining year-on-year? Thank you.

Okay, thank you very much for your three questions. Your first question is related to the size of the buyback. Yes, we announced that we intend to buy back 250m shares total. Actually we repurchased 192m. The reason is very simple, it’s to maintain our shareholder’s value. We do not expect -- we didn’t intend to spend excessive money in repossessing. So we gauged the performance of the market and eventually we concluded with 192m shares.

As to the timing for cancellation, we intend to cancel shares during the second half of this year. The approval procedure for this is relatively simple. We don’t anticipate any difficulties to be encountered in canceling the shares.

Your second question is related to the early retirement programs, and I'm sorry I didn’t really get the very clear statements from you, please.

Sure, I will repeat that. You’ve indicated you’ve obviously taken a one-time charge of TWD2.2b. Over the year end results last month you indicated, I think, that you expect the cost savings that come through to probably offset the TWD2.2b charge for the rest of the year. Is that correct? Or is this TWD2b charge an extra cost that will probably stay for the whole of this year?

Okay, let me mention the -- the amount’s that charged during the first quarter due to this ERP, early retirement program, is TWD2.2b. And as I mentioned during the presentation, that the cost savings starting from next year, that will be TWD3.2b per year afterwards, starting from next year. And I mentioned that we intend to recruit about 600 new staff this year. And the net effect for this year -- you are more concerned about the personnel expense for this year.

Yes.

The net results from those who left, who have already left, and so the personnel expense for those who left, that will be saved. And also taking into consideration of the number of employees, 600 employees, to be recruited. So the net effect for this year’s personnel expense would be an increase of roughly TWD200m. Is that clear?

Very clear, thank you.

Okay, and your third question is on the guidance and just a moment, please.

Anand, could you please repeat the question?

Yes, sure. I was just looking at the guidance with appears reasonably conservative to me. Now this is per track record of Chunghwa management, where you’ve been reasonably conservative with your guidance. I just wanted to check if that's the case, or there are any specific charges or expense items in here, or due to which you expect profit to be declining by a reasonable amount year-on-year.

Well, the management intends to offer rather accurate guidance for this year. The revenue is TWD184.2b which is about 0.4% higher than what we achieved last year. I believe the market condition and the basic catalyst of the industry is [inaudible], and the TWD184.2b in revenue is not conservative. And, of course, if the economy proves to be stronger than expected, maybe if we have a chance to reach TWD180b, a better result that will be fine.

Sure, sir. Just to follow up, any part on the net income line item is that conservative, or is that also realistic?

I believe TWD184.2b to is very realistical, yes.

And what of net profit of TWD44b? The net income guidance of TWD44.2b?

The income TW44.2b? No, we accounted for the costs and expenditures, and also the tax rate that will probable be slightly higher this year as compared with last year. So TWD44.2b for -- is also rather realistic, yes.

Okay, sir, thank you so much and apologies for taking up so much time. Thank you again.

Okay, thank you.

Next question, go ahead please.

Hi, there. Thanks very much for the call. It’s Henry Cobbe, Thames River Capital. Just two questions. First, just looking at your net fixed assets, that declined quite substantially quarter-on-quarter. So I just want to know if you took any asset write-downs, there’s about TWD7b reduction on net fixed assets?

And the second question is coming back to the personnel expense. Would you have -- you said that you expect the personnel expense to increase TWD200m year-on-year. Could you just give us what the base was for that estimate, for that guidance, what was the base? And also will the severance cost always be reported below the line as non-operating income, going forward?

Well, let me answer your second question first. The -- among what I mentioned answering the previous question. The TWD200m, the net increase in personnel expenses for this year is only for this year. As I said, starting from next year the saving from the -- from those who took the early retirement program will be TWD3.2b.

And your first question is on the -- on our EBITDA and fixed assets.

On your fixed assets, the reduction in fixed assets.

For the year-over-year results we used to write off the fixed assets of about TWD740m, due to the -- our investment of the financial [one-on-one] years.

Okay, and sorry, on the personnel you're saying a 4 -- a TWD200m increase. That would take it to TWD38.4b in 2006, is that correct?

The TWD200m in our expense, that will be part of our personnel expenditures this year, yes.

And you're saying there's an increase of TWD200m. So I'm just wanting to know --

Compared to what we -- in our original expense. This is comparing with our budget. It’s the result of these numbers. Let me qualify this. Now, we have 1,292 left so we save on their expenses, on their personnel costs, and when we hire 700 -- 600 more and also with the amount of compensation we need to pay for those who left. So there are, let me see, there will be a saving out of the personnel salaries and bonus from those who participate in the ERP.

And there will be costs associated with the early retirement package, and will be personnel costs for those who have joined the Company, those 600. Because the net -- the difference of those three items is a net increase of TWD200m, yes

Okay, and what was the budget number? Is it in an increase? What was the base number for that? Because the budget number was -- I also had at TWD36m.

Well, the budget number is included in our guidance.

Okay. Well, is there an English version of that?

Well, it’s included in our guidance, and so we have already factored in this in our guidance, yes.

Okay, and the severance cost of TWD2.2b in first quarter, that all came below the line in non-operating expense, didn’t it?

Pardon me?

The severance cost of TWD2.2b. Am I right in thinking that all came as a non-operating expense?

Well, you also have to -- you also have to -- already been in -- excuse me, yes. This is in the -- in our costs, in our personnel costs.

It’s in the personnel costs, yes, okay.

Yes.

Thank you.

Go ahead please.

President Lu, hi, it’s Tim Storey from JP Morgan. Thank you for the call. Two quick questions. The first one, following up from an answer you gave earlier, where you indicated the slightly higher tax rate. Could you give us some more specific guidance on what you think the tax rate will be in 2006?

And the second question is, can you now give us an update? Now that you’ve completed your share buyback of 192m, what is your next capital management plan? And specifically, could you make any comments about any strategy for capital reduction, please? Thank you.

Well, thinking about the effective tax rate for this year, we estimate it will be between 21 -- about 20 to 21%.

Okay.

Yes, and the capital, whether we have a plan to further conduct any capital structure improvements. We have not yet make any decision on this but the [inaudible] in our -- we keep our options open. And we like to see the situation in near future, and then to decide on whether to have any specific activities or not, yes. We have no specific plan at this stage.

Can I just ask a follow-up question on that with regards to capital reduction? Can you just remind us what you consider to be the most important issues in the process of the capital reduction? Is it the potential delisting of the shares for 30 days, or are there other factors that you are considering as being major reasons on whether to proceed or not?

To answer your question, capital reduction, of course, one concern would be the suspension of trading for one month. And we have talked to some of our shareholders and majority of the answers indicated that, as long as the [manage] really picking up, the suspension of one month is okay. And other concerns would be whether this is the best way to make use of our capital.

Okay. Thank you very much, President Lu.

Okay, thanks.

You are on the line, go ahead please.

Thanks. It’s Lina Choi from Morgan Stanley. I have two questions. First, it’s just again to follow up on the personnel expense front. President Lu, you mentioned that in ’07 there will be a TWD3.2b of saving. I just want to confirm, is that a net number? Will that -- will there be any associated new recruitment cost or compensation package cost associated with that TWD3.2b net? Which means if you report, for example, a TWD25b of personnel expense in ’06, does that mean ’07 personnel expense will be TWD22b and thereabout?

Second question is with relation to your international and long distance revenue. Have you seen more impact from [Skype]? How is Chunghwa’s own VOIP services going? It seems like in the first quarter you are seeing a particularly steep decline in revenue permanent on the VOIP front. Thanks.

Yes, let me answer your second question first, Lina. The impact of VOIP or Skype on our VOIP. Yes, from our internal analysis probably there is some impact from VOIP and Skype, IOD. And our calculation indicated maybe something -- it’s less than 10%, about 9% of the revenue decline is due to VOIP or Skype, yes.

And your -- to answer your first question. The TWD3.2b savings is calculated from the roughly 1,929 persons who participated in the ERP and -- so that’s the net saving from this number of employees’ departure. Of course, as I mention, if we hire about 600 people later this year and those who join the Company, of course, will pay out some cost expense, personnel expense, next year, yes. And so in this sense the TWD3.2b is not net.

Thank you, that’s very clear. Thank you very much.

Okay, thanks.

Go ahead please.

Hi, thanks very much for the call. It’s Shirley Tse from UBS. I just have two quick questions. First on the G&A expenses. I noticed the number jumped by around 25% year-on-year in the first quarter this year. I was wondering if you could elaborate a bit on why that came about, and if that’s a trend to continue throughout the year?

And secondly on the use of your capital. Are there also plans or discussions about using your capital to invest in local or overseas investments at this stage, for example, like the distribution channel?

Our G&A remains relatively flat in the -- especially the depreciation declined slightly this year compared to last year. Especially the first quarter the depreciation declined by about TWD130m. While amortization increased a little bit because of 3G prices freeze amortization.

Sorry, about the general and administration expenses.

G&A.

Yes.

I'm sorry.

Because that number seems to have jumped and I was wondering if you could explain, and then elaborate a bit further?

The figures here in our -- according to U.S. GAAP, G&A here includes all those compensations associated with the early retirement program package. So --

I noticed under the ROC GAAP basis the number was also up 25%. So was there other items that were included that were not compensation related?

Well, the G&A, the quarter-over-quarter, the increase of about 50, 51%, is due to -- there are -- the early retirement program package amounted to about TWD176m. And we make donations to non-profit organizations, about TWD200m. And the other one is the expense related to the discount that we -- given also to our employees subscription of shares upon privatization. And also the performance based incentives we only provisioned here for -- under G&A.

So these are the items that contributed to the increase in G&A for the first quarter.

Thanks. And second question about investments?

About investments. Yes, whether we would engage in any M&A in our domestic or international. The Company has no specific plan at this stage, no target, specific target at this stage. And, of course, the management’s also assessing any potential distribution channels or in -- but it has to be very -- something that’s worthwhile and then we will consider. Otherwise we are happy with the current arrangement with our distribution channels.

Thanks. Just a quick follow-up question to the buybacks. Once your shares have been cancelled for this current buyback, would you consider doing another one this year?

I -- this is -- well, this -- we maintain our options open. So we have not decided whether to conduct another share buyback at some time, or whether we consider capital reduction or we do nothing. We have not reached any conclusion at this stage.

Thanks very much.

Okay, thank you.

Go ahead please.

Hello.

Yes please.

Hi, it’s Helen Zhu from Goldman Sachs. I just have about three questions if you don’t mind. The first question is just to make sure, regarding what you were talking about earlier with relation to early retirement programs. You said there could be more in the future. Is it that there could be more within 2006, or are you saying that the future would be 2007 and onward?

The second question is with relation to the pension guidance. I was wondering whether you could let us know what is your approximate pension liability for this year and next year in preferably both ROC GAAP and U.S. GAAP?

And then the third question is really about your top line guidance for revenue this year, as Anand was talking about earlier. You are quite confident on getting a little bit of revenue increase this year. Given the fixed line substitution trends, mobile substitution trends, I was wondering how much revenue growth do you think you can see this year from the Mobile business versus previous years?

And secondly, on the Broadband and Internet and data side, it seems like there's some slowdown in subscriber additions. What do you think is a saturation point for the market in terms of penetration for broadband? And how much additional growth do you see, let's say in the next 12 to 24 months?

Okay, very good questions. On the early retirement package, we -– highly likely we will not have another ERP, early retirement program, this year and we may consider to conduct further retirement packages next year.

And your second question, the pension guidance according to ROC and U.S. GAAP. Based on either ROC or U.S. GAAP, our guidance for pension in this year or next year, it's going to be about TWD3.2b. TWD3.2b.

And your third question relates to the top line guidance. Of course we have to be very aggressive in pursuing, in generating revenue, so we would -– we work very hard to create revenues, to generate revenue. So the number I mentioned, we want to be able to -– we have confidence that we can achieve about what we've put up here. The FMS, fixed mobile substitution, is still the phenomenon but we have factored it in the decline in the fixed line revenues, but we believe Mobile operation we still have room for growth. So we are more aggressive in putting package for Mobile service.

And Internet and data, this is the growth -– this is the area we have stronger growth, and the penetration of broadband today is over 60% of households, so the market indicated a somewhat slower take-up compared to the previous years. And our target for this year is to add 500,000 and we are confident that we will do our best to achieve this. And our focus maybe for next year would not be half a million but [certainly] maybe at least 300,000 net adds in broadband. The target of 6m households with broadband is still our target here.

If you don't mind if I follow up a little bit on that then. To go into a little bit more detail on the Mobile side, we did see that for Far East Tone and Taiwan Mobile for example their 1Q '06 revenues were less than 1% year-on-year growth. You did a little bit better, about 3%, but at what level do you think you could come in in terms of full-year Mobile top line growth? It seems like the average price per minute has come off a little bit.

Yes, I also noticed that the performance of our peers is just like what you mention. We do better than what others are doing. And for this year the Mobile, we would like to say that the post-paid customers, we still have room for growth on post-paid subscribers on 2G. I mentioned about the [inaudible] half a million in our 3G subscribers, net add of half a million on 3G. We still have another target to add about -– okay let me state this again, okay I'm sorry.

Our total net adds on Mobile this year is half a million and this includes the net adds of 2G subscribers, and on 2G we aim to add 280,000 -- I'm sorry, I need to make myself clear enough to answer your question. I'm sorry and I take a while for me to get this straight, okay?

No problem.

Okay, we will add 500,000 3G subscribers. That's on 3G. As I indicated earlier that about 83, 82% of our 3G subscribers are coming from our 2G. So there will be this migration from 2G to 3G. So the net adds on Mobile would be about 280,000. Is that clear?

Okay.

Yes, okay.

And you think you --?

And the ARPU, the important message is the following -- I presented in slides. ARPU from 3G is higher than that from 2G, so that's why we emphasize half a million 3G, new 3G subscribers. And this will take up some of the revenue, this opportunity for growth in revenue.

So do you think you can do, let's say 3 or 4% year-on-year growth in Mobile this year?

About 3, better than 3%, yes.

Okay that's great. And also does that assume –- a month ago at the full-year results you mentioned that you're hoping to keep the handset subsidy budget at the same level as that of last year, which was I think a little bit over TWD5b. Can you achieve 3 to 4% top line growth and still keep the subsidy budget flat, because we saw that there was quite a bit of increase in [SACs] over the past couple of quarters?

Yes, I remember saying that we will have to maintain our handset subsidy at the same level as we did last year, but the competition and also the price of the handsets is still a factor for our reconsideration. So maybe it will end up a slightly higher handset subsidy, but we believe it's going to be worth it.

Okay thank you.

Okay thanks.

You are on the line. Go ahead please.

Hello, this is Matt Adams from Deutsche Bank. Thanks for the call. I just had a couple of questions. One, can you discuss the performance bonuses that you're starting to pay, what the guidance is for that for the year? And you mentioned you're starting to accrue for that. What would be the total amount and what have you accrued so far?

Can you also give some guidance on EBITDA margins and then CapEx? Thank you.

The CapEx for this year we budget it about TWD106b.

The EBITDA, from our guidance our EBITDA margin would be around -- ROC GAAP, under ROC GAAP -- this is about 52%. EBITDA margin under ROC GAAP is about 53, 53.4%.

The performance based incentive in our budget for this year is about TWD2.26b and we have already taken into account for the first quarter maybe only about a quarter of this amount.

Great, thank you very much.

Okay thanks.

Go ahead please.

Hello, it's Simon Cheung from Merrill Lynch. I have two quick questions. One, now that you have pretty much completed your share buyback for this year, I'm wondering whether you can give us some guidance as to the impact on your payout ratio in 2006?

And secondly, this is a follow-up on your -– the question on broadband. I'm wondering whether you can give us some comment as to how the cable TV operators has been competing with you guys? How would -- how have they been impacting your net adds as well as the ARPU? Thanks.

The competition from cable TV on broadband is still minimum at this stage, although we have heard some reports saying that they are trying to get together and to offer VOIP services along with their cable TV. Efforts along this line [we crossed in] [inaudible] new activities and to see if they really are doing anything significant. But so far still not a major threat at this stage.

And the ARPU, we believe -- we have no intention to adjust our rates downward. No, we have no plans and we intend to maintain our ARPU throughout this year.

And the impact of our share buyback to our dividend in our payout ratio for next year. Okay. Well, as we mentioned earlier in a previous call that we have [completed this] share buyback and that we also increased our capital to be qualified for tax incentives for our 3G operation. And the net results of this, the payout ratio for next year, [during] next year for this year’s results, and we also need to achieve the percentage of our net income for our employees and also for directors and supervisors.

So we have all these functions and calculated to indicate that from our guidance and also those assumptions.

Yes, regarding the payout ratio for 2006, I think if we had -– we make the employee bonus to be 2% and the remuneration for the directors and supervisors the percentage 0.1%, then the payout ratio will be 90% minus 2%, minus 0.1%. I think that's the payout ratio if that's the condition. But up till now we haven't any decision for that.

Well I thought the share buyback would have an impact on the ‘06 dividend side, so you -- maybe you have to subtract that?

Okay, if we consider, because right now we're going to cancel the shares in third quarter, okay? Then we -– because this time we have about TWD2.1b increase of capital. If we factor in these two items then the [ retained earnings for this year will be around -- you know this is all according to our ROC GAAP guidance -– so the retained earnings will be around TWD370b. About 37b. That's the total retained earnings, because 10% will be the legal reserves and we have to distribute the employee bonus, plus the remunerization for the directors and supervisors. So the total number will be -– as you know, if the first scenario will be that 2% for employee bonus and 0.1% for the supervisors and directors, then the EPS -– yes, then dividend per share will be -– the payout ratio will be around 77%. Yes, about that.

Okay. Great, thanks.

[OPERATOR INSTRUCTIONS].

Hello, it's Helen Zhu again. If you don't mind, I have a couple of follow-up questions. Simon mentioned earlier the shares outstanding etc, and the buyback. We noticed that at the end of the first quarter the shares outstanding number in the financials is already a lower number than the previous 9,648. We were just wondering why this number is lower already. Is it already assuming –- is it like a weighted average number already assuming the cancellation of shares bought back?

And secondly, in terms of Mobile competition, both Far East Tone and Taiwan Mobile said that they have toned down their subsidies and commissions around March or April and that's probably responsible for the EBITDA margin improvement for Far East Tone and a little bit better margin guidance for Taiwan Mobile in the second quarter. Has Chunghwa done the same thing and, if not, do you have plans to turn back on your promotional activities on the Mobile side as well?

Let me answer the second question first, okay. The Mobile competition, we are monitoring the market's activities and we haven't really changed that since that what you mentioned did occur, yes, because we believe our peers still give away quite handsome subsidies to their customers. And, well as I mentioned earlier, I read some of your reports indicating that they -– one or two, both companies would like to see a better EBITDA margin, or better performance going forward. We would like to see that happening because this is, in a way, we can offer better results to our shareholders. And yes, we will see and if it's the market condition impacts that, we would like to match with whatever happening in the market, yes.

And the first question, I'd like to Fu-fu to answer.

Helen?

Yes.

Hello. You mention about that -– the number, the capital stock in the balance sheet. Did you know by the end of March 31 we actually bought back 140m shares? Because the whole program actually ended at April 7, so I think probably this is the answer to your question.

So basically even though you haven't canceled the shares yet the number of shares outstanding at the end of the quarter is actually a weighted average number, assuming that the shares you bought back have already been canceled.

You see that this share buyback stock will be –- the buyback shares will be canceled in third quarter, so right now the end of first quarter, the outstanding shares still remain the same.

Okay. Actually can I --?

Yes, please.

Hello, just a follow-up question from Henry Cobbe. Just on the dividends, you're saying that the payout ratio will be reduced to 77%. Could you just confirm what the dividend per share would be in dividends per share?

Yes, according to our calculation it's around 77%.

Of '06 net profit?

Net -– it's not net profit you know. This is actually based -- according to our track record we always pay 90% payout ratio but last -- for the first quarter we did the share buyback, so this will have some trade-off between the reported earnings and the dividend payout. So this is one factor.

The second factor is the employee stock bonus for last year we decided to pay about 3% of our reported earnings to our employees. Of course [we've not] decided upon the period of the privatization period. But for this year we haven't decided the percentage but if we say 2% for employee bonus and 0.1% for directors and supervisors, plus that share buyback trade-off. The whole three factors altogether that make our payout ratio be around 77% instead of 90% as before. Okay?

I see. Okay thank you very much.

There are no further questions. I will turn it back over to President Lu.

Well thank you very much for your patience and for your participation in this call. Goodnight. Thank you.

Thank you, President Lu. That's all for today's conference call. Replay details will be available on CHT website at http://www.cht.com.tw. We would like to thank you all for your time and to thank you for using [inaudible] conference service. You may now disconnect your lines. Goodnight.