Chunghwa Telecom Co Ltd (CHT) 2006 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company’s first half 2006 operational results. [OPERATOR INSTRUCTIONS]. Now, I would like to turn it over to Chairman Ho-Chen, the host of the conference. Thank you. Chairman Ho-Chen, please go ahead.

Thank you. Good evening, everyone. This is Ho-Chen Tan, Chairman and CEO of Chunghwa Telecom. I would like to thank you all for joining our first half 2006 earning results conference call. We will begin today’s call by having President Lu to take you through a review of our financial and operating results. Following that, I will step back in and take you through our company strategy and President Lu and I will be happy to take your questions.

Before we begin, please note our Safe Harbor statement on the second slide.

Before we go into a review of the financial results, I would like to start with a brief review of our special events and awards that we’ve recently won. First, we cancelled the buyback shares on June 30. Overall, the buyback program was a success and brought our capital stock down to its current level of TWD94.5b.

In addition, MOTC lifted Chunghwa’s foreign ownership limit from 40% to 49% in July, which is expected to give foreign investors more flexibility when including Chunghwa in their portfolios.

As for awards, I’m quite pleased to report that the SFI, or the Taiwan Securities and Futures Information Center, awarded Chunghwa as one of the companies that best practice the disclosure of company information via different channels, including [GSE] website and through our annual report.

I think this award is a recognition of our efforts to adhere to the high standards of information disclosure. We place great importance on this internally and it gives us great satisfaction to get publicly recognized with such an award.

In addition to this, we also won a prize in AsiaMoney’s poll of use of the year 2005. Our ADR offering in August 2005 was singled out as the best country deal. The award was given in recognition of our US$3.1b privatization, which was the biggest deal in Taiwan in 2005.

Now, I would like to hand the call over to President Lu. President Lu, please.

Thank you, Chairman. Let us move on to the financial results for the first half of 2006. First of all, I would like to explain to you the different accounting treatments for U.S. GAAP and ROC GAAP in our first half results.

Under U.S. GAAP we reserve for 10% anticipated earning tax on our anticipated after-tax earnings, the employee bonus remuneration for directors and supervisors and the creation of the discount for employees’ stock subscriptions as expenses. This were not the case under ROC GAAP. Officially, the compensation for the early retirement program, or ERP, was categorized as personnel expenses under U.S. GAAP but it was categorized as other expense under ROC GAAP.

The different accounting treatment that could diverge in financial results, that will be shown in the following slides. Once again, we would like to emphasize that we use ROC GAAP to calculate our dividend.

We are now following through the slides. I will move on to slide five. On the right-hand side of the slide we provide the financial data under ROC GAAP which we believe are more relevant to our operations. Under ROC GAAP the operating profit for the first half of ’06 increased by 2.9% year-over-year, mainly due to our continual growth in mobile and Internet data business.

Under U.S. GAAP total revenue for the first half of ’06 was TWD90.7b [sic - see slides], which is a 0.8% increase year-over-year. This was mainly driven by continued growth in the mobile and Internet data businesses. EBITDA for the first half of ’06 decreased by 6.2% to TWD46b. Operating profit decreased by 10.6% to TWD25.8b, and net income decreased by 20.4% to TWD19.8b.

The decreases I just mentioned were mainly due to the increase in personnel costs of TWD4.9b, including the compensation expense for the ERP, the employee staff bonuses and the remuneration for directors and supervisors.

On slide six, we show quarterly figures. For the second quarter ’06, revenue increased by 3% quarter-over-quarter. EBITDA increased by 6.2%. The operating profit and net income increased by 12% and 12.2% respectively, mainly due to seasonal effects and ERP expenses.

On slide seven, we take a look at our individual business units, comparing the results for the first half of ’06 and the first half of ’05 under U.S. GAAP. Internet and data revenue increased 11.5% and 6.9% respectively. Internet revenue increased because our ADSL subscriber numbers continued to increase, and our strategy to upgrade customers from lower speed to higher speed broadband services continued to be implemented successfully.

Mobile services reported 1.7% growth, mainly due to increase in postpaid subscriber numbers. In the fixed line business, local revenue decreased by 6.9%, mainly due to mobile and [broadband] substitution. DLD revenue decreased 8.5%. ILD revenues decreased by 2.5% compared to the first half of ’05, because of the decrease in average user fees due to various [measures]. Segmental revenues based on ROC GAAP are also presented on the right-hand side of this page for your reference.

So, moving on to slide eight for the quarterly results, Internet revenue were TWD8.8b, a 2.5% increase quarter-over-quarter. Data revenue remained the same at TWD2.6b. Revenues for the mobile business increased by 1.8% to TWD18.3b. Fixed line revenue increased by 3.9% quarter-over-quarter.

About our revenue composition, on slide nine we can see that our growth areas continue to account for larger portion of total revenue. Comparing the revenue composition from the first half of ’06 to the same period in ’05, Internet data revenue increased from 23% to 25% for our total revenue, while mobile revenue increased from 39% to 40%. We expect this trend to continue.

Let us move to page 10. Under U.S. GAAP, total operating costs and expenses for the first half of ’06 increased by 6.1% year-over-year, while they remain flat under ROC GAAP.

On slide 11, for the second quarter operating costs and expenses decreased by 0.3% quarter-over-quarter. This was also due to the compensation expense for the ERP in the first quarter.

Now, about our CapEx on slide 12. The CapEx for the first half amounted to TWD11.95b, which was a 22% increase compared to the first half of ’05. The main reason for the increase was higher spending in the mobile segment, especially for the construction of our 3G systems and expansion of 2.5G network.

Our cash flow from operations remained strong, as you can see from slide 13. It reached TWD46b for the first half of ’06 compared to TWD37.5b for the same period of ’05. TWD46b for the ’06 first half. As of June 30, 2006, our free cash flow from operating activities totaled TWD34b, a 23% increase as compared with that of June 30 of ’05.

Next let’s move on to the business review. We will start with Internet and data on slide number 15. ADSL subscribers totaled 3.84m as of June 30 of ’06, which was above 14% year-over-year increase. The number of subscribers for 2 megabits per second and higher speed accounted for 61% of our total ADSL subscriber base, which is compared to 57% back in June of ’05.

Moreover, the total revenue from ADSL access services in the first half of ’06 increased to TWD8.9b compared to TWD7.8b in the first half of ’05. This solid 14% increase was primarily a result of our specific effort to migrate customers to higher speed services, and the increase in the subscriber numbers. We continue to maintain a commanding position in Taiwan’s broadband market, with a market share of more than 85% at the end of June. Furthermore, about 80% of our ADSL subscribers use our HiNet ISP service.

On slide 16, we show the results of our aggressive promotion of our 2 megabits per second and 8 megabits per second services in the left-hand chart. This shows that the average bandwidth per user was 2.4 megabits per second as of the end of June ’06, which was an increase of 27% compared to June ’05.

Our ADSL ARPU for the first half of ’06 was TWD754 per month, which compares to TWD791 in the first quarter last year. The decrease in ARPU was due to our promotion of a 256 kilobits per second package and loyalty program discounts. However, the Company continues to upgrade subscribers from lower speeds to higher speeds, which helps mitigate the decrease in ARPU.

Now, about our IPTV services. According to the guidance from NCC, the new regulator, we are going to provide an open service platform that will bring us back to being a pure telecom operator. With NCC’s approval, our IPTV offerings do not need to follow the cable TV regulations. Therefore, the IPTV service areas will be nationwide and our customer base will be enlarged.

Furthermore, the tariff will not be set at different levels by different local authorities. The unified basic tariff structure gives us a more steady upfront cash flow. And additional revenues for on-demand [VOIP] and applications are also expected to increase. The open service platform, together with enlarged customer base, will enable to us to attract more content on the applications, which content on the applications will in turn attract more customers.

The speed of net add subscribers is picking up with a compound monthly growth rate of 27.6% from January to July of this year. We will continue to market the broadband access plus IPTV bundle service.

Now, I would like to move on to our mobile business on slide 18. At the end of June 2006, our total number of 2G and 3G members was 8.2m. Our market share of 2G subscribers was 40.7% and our revenue share was 35.3% in the first half of ’06. Those are the highest in the market. We are also happy to disclose that our 3G subscriber base keeps growing. At the end of June we had 408,000 3G subscribers.

In early June we began to offer a new handset model, the CHT 9000, which is co-branded with FTC, a leading local handset manufacturer. CHT 9000 is featured with push email and 3.5G Internet capability. Our ARPU for [69,000] subscribers was TWD1,600 in August. On this, 30% was from value-added services. In addition, around 10,000 handsets were sold from July 3 to August 20, accounting for more than 50% of the Taiwan PDA market in the same period.

To date we have 86 stores exclusively serving Chunghwa’s customers. These stores are managed in cooperation with our handset distributors. From April to July, young subscribers below 30 served by these stores was about 1.5 times that of our outlets. Moreover, these stores are also complementary to our outlets for additional evening hours and weekends and holidays services.

On slide 19, we show that our blended ARPU was TWD734 for the first half ’06, which is flat when compared to the first half of ’05. The AMPU, average minutes per user, in the first half ’06 increased 3.2% year-over-year. We are also happy to report that our blended churn rate for the first half ’06 decreased from 8.4% to 6%. In addition, the churn rate for the postpaid subscribers was only 5.1%. This is mainly owing to our [inaudible] coverage, high quality network, accurate billing system and competitive promotional packages.

Mobile value-added service remains a primary focus for Chunghwa Telecom, as you can see on slide 20. Mobile value-added service revenue for the first half ’06 was 33.6% higher than in the first half of ’05, with mobile Internet services experiencing the highest growth.

Now, moving on to slide 21, currently the average monthly fee from 3G subscribers is two times that of 2G subscribers, while 3G ARPU is 67% higher than that of 2G. The value-added service ARPU for 3G subscribers is 38% higher than that of 2G subscribers. In July, 70% of new subscribers are supplied with 3G handsets. At the end of June ’06, 31.6% of our 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 3G subscribers, 79% migrated from our 2G services, which we believe is a very solid migration record.

Our mobile bundled services, including Energy Plan and F-2, proved to be well received. This is on slide 22. We started to offer our Energy Plan in April of this year. By choosing the Energy Plan, subscribers can enjoy free traffic for mobile on-net calls, off-net calls and calls from mobile to fixed phones for a certain amount.

On the upper half of the slide, subscriber numbers for the Energy Plan experienced significant growth with a compound monthly growth rate of 62.7% from May to July.

When choosing F-2, subscribers can enjoy a significant discount on a group of six fixed lines and ten mobile numbers. On the lower half of the slide, subscriber numbers of F-2 have kept growing from January to July, totaling 1.76m by the end of July, with a CMGR of 1.2%.

At the end of July, subscribers choosing the Energy Plan reached 147,000 and F-2 subscribers represented 21% of our total mobile subscribers. These bundled services help to enhance subscribers’ loyalty. And subscriber growth for both the Energy Plan and F-2 is quite healthy for our mobile business.

Finally, moving on to the fixed line business on slide 23. Total fixed line revenue for the first half ’06 declined by 6.2% to TWD31.32b, mainly due to the effects of mobile substitution, the continuous migration of dial-up subscribers to ADSL broadband service and the fixed line competition. For international long distance traffic continued to grow, which resulted from the growth of wholesale traffic. On slide 24 we show that ILD outgoing traffic increased 8.3% in the first half ’06 as compared to last year.

Now, I would like to turn the call over to Chairman Ho-Chen for our near-term business outlook.

Thank you, President Lu. In conclusion, I believe our strategy is quite clear. For Internet and data business we aim to add 500,000 ADSL subscribers by the end of this year. Moreover, we are providing bundled service for ADSL plus wireless Internet and initiated FTTH services with speeds of 50 and 100 megabits to cater to customers’ needs.

On mobile service front, we also expect to add 500,000 3G subscribers by the end of this year. We will continue to drive adoption of value-added service and 3G service. We are also investing in construction of next-generation networks. With NGN, new services with new revenue streams will be expected to be available in the near-term and network maintenance expenses will be expected to be saved in the long run. We are convinced that we can maintain our fixed line market share due to our quality network and the comprehensive coverage.

The following slide is showing other business outlook. In addition to our core business, we also are taking a close look at our property assets, and especially we are looking at which properties would be worth revitalizing. We are working on re-zoning land use to fully utilize the value of assets, selling lands that are not worth developing and finding lands and buildings that are available for leasing or joint development.

In terms of capital management, we would like to see more opportunities for the Company to conduct investment projects related to our core businesses. There is also a possibility for further share buyback or capital reduction if we do not find suitable investments that we feel will lead to long-run appreciation for shareholders’ value.

On the regulatory front, we will proactively open dialogue with NCC commissioners in the participating in the formation of new rules for IPTV. We do expect to have a win-win situation [inaudible].

This concludes our presentation. I would like to take this opportunity to thank you all again for attending. We appreciate your continuous support. We will be happy to take your questions now. Thank you.

[OPERATOR INSTRUCTIONS]. Here comes the first question. Go ahead, please.

Yes, hi, good evening. Thank you very much for the call. My name is Anand Ramachandran calling from Citigroup in Hong Kong. I have three quick questions. Firstly, on the IPTV business, presently you talked about open access. I was wondering if you could provide us with some more color on exactly what this involves. Does this mean you basically open up access to the cable TV providers or anybody else to your network? I’d just like more color on what that means, and also maybe an update on the number of subscribers as of June.

My second question would be on the ADR issuance. I was wondering if you could give us some color on the timing on that, as well as the potential size. I was also wondering whether in your foreign shareholdings some shares had been allocated for this ADR as well.

And the last question is really on some [more specifics] on the capital reduction or the share buyback effort. I was wondering if you could provide us with some timeline on when you plan to implement this. Also, should we be expecting another share buyback effort this year? Thank you.

Your first question is related to the issue of operating performance for IPTV, is that right?

Yes, that’s right.

Okay. As I mentioned during my presentation, we follow the guidance from NCC and we work together with them to understand their intentions. And this open service platform is open, is a service platform, not the network, okay? So, let me emphasize, it’s a service platform, not open, okay? So we will work on all the content providers to offer their contents. And, for example, we serve our applicator, content applicators. So they have their channels, your content, and we will applicate and then deliver through our MOD infrastructure to customers.

And we will also receive customers from other ISPs if they follow in our [expectations] with the MOD service. So these are the types of openness that will be implemented. Is that clear to you?

So you said you will have other ISPs to offer access and content?

No, our customers -- the customers of other ISPs. If they follow the same type of arrangement, service arrangement, their ISP customers, the customers of the ISP can also subscribe to our MOD service.

Okay, understood.

Okay, thank you. And then your other question, maybe Chairman Ho-Chen would please answer that?

Yes, referring to your second question about ADR, you’re probably aware that we are in the process of tendering the book numbers for a further share offering and it will be difficult to predict when the deal will be done. And also, since it is still in the process, we have to discuss with our government the -- what is the preferred allocation of the size for ADR or for a domestic offering. So we will know more during the tendering process. We certainly will let all of you to know.

Is there a question regarding to the -- even the [more big] concern about capital management, like a share buy -- further share buyback and a capital reduction?

I would say, after a successful share buyback earlier this year, we keep communication with the government about further efforts for revise our capital structure. We trust they now realize the significance of the issue and we should take the opportunity while preparing an ADR offering] with the representative of our shareholders to discuss more on the issue.

So currently it will be difficult to define any timeline for further action. Certainly that already bring to government’s attention, and we should plan professionally and closely with them. Thank you.

Thank you, sir.

Next question. Go ahead, please.

Hi, thank you for the call. It’s Jimmy Chung from JP Morgan in Hong Kong. I have two questions, the first relates to your property projects. How big do you think this part of the business could get to and what sort of timeframe are we looking at? Are we talking about 5% of earnings in a few years time or does management think this could be a material contributor, saying 20% of earnings in a few years’ time?

And the second question is on the tax rate. The first half tax rate was quite high, around about 27% using U.S. GAAP. Does management see the second half tax rate coming down to previous guidance at around about 21/22%? Thank you.

Your second question is regarding the effective tax rate. You are referring to the U.S. GAAP, so we would recommend you pay attention to ROC GAAP, because this is more appropriate. The effective tax rate for this year we project to be around 22%. Okay?

Okay, thanks.

Some of the benefits from tax incentives were realized in the second half of this year, so the current figures is a little bit higher. It’s going to be averaged out during the second half of this year.

Regarding the property development, the revitalization of our fixed assets, the specialist and property projects, the Company has already initiated a couple of programs and we have also selected [users] for two projects. All this are –- the size of the projects is relatively small compared to the size of the Company.

So there will be some earnings generated when the projects are completed but would not be significant. In a few years –- in the coming years for -- because it’s relatively small. And very rough, just for your reference, a very rough estimate, it’s only a very preliminary estimate of, say, maybe about 10 locations if we realize, after all the expenses, maybe will bring in about TWD1b over next three to four years. So it’s something that’s worth pursuing but not really a significant contributor to the bottom line.

Thank you very much.

Next question. Go ahead, please.

Hi there. Thanks very much for the call. It’s Henry Cobbe from Thames River Capital. I just wanted to confirm a couple of issues. The first was the subscriber number for your media on demand base as at end of June ‘06.

The second was could you confirm the CapEx guidance numbers that flashed up on Bloomberg of TWD29b and TWD30b for 2006 and 7 respectively? Which I note is an increase from TWD26b, I think, which was the previous guidance.

And the last question is just on the regulatory side. What’s the timeframe for these issues being settled with regard to open access, local loop unbundling and any other outstanding issues?

The total number of MOD subscribers by the end of -- it’s about -- by the end of June is about 190,000. This figure is until very recently, until August. Okay? Currently, by now, we have 190,000 MOD subscribers. Okay?

And our CapEx for this year is about 2 point -- 26b -- TWD26.1b. Maybe you have heard some different figures. I would like to clarify. It’s TWD26.1b for this year. Okay?

And the regulatory issues related to local loop unbundling, it’s already been unbundled. Okay? And we have agreements with some of the fixed line operators on various arrangements. The issue in front of NCC is to assess, either to categorize local loop as essential or so-called bottleneck facility or not. And NCC is now reviewing opinions or comments from various parties.

And you also mentioned about the wholesale price issue?

Yes. And my understanding was the reason local unbundling had been so slow was because of the pricing structure. So might you be forced to reduce you local line rates?

Local line rates? No.

[The] line rates.

On the unbundling of local loop, the rate, currently we have agreed, we have signed agreements with other operators. So it will stay the same until the end of the contracts, all the agreements, and we need to renegotiate with other operators on the price. At this stage, NCC has not stepped in to ask us to change our rates.

Okay. And is there any guidance for CapEx for 2007?

CapEx of this year?

For next year.

‘07. ’07. We have already started our process to budget our next year’s programs, so we have not finalized our CapEx for next year. Although we did some estimates or forecasts for five years’ time but those are very preliminary figures. And we will have a better idea towards the end of the year when we finalize our business plan for next year.

Okay, thank you very much.

Next question. Go ahead, please.

Hi, thanks for the questions. It’s Simon Cheung calling from Merrill Lynch. I have three questions. One, I remember, in the full year targets that you’re earlier giving out, on the revenue you’re basically targeting about 3% revenue growth on the mobile side. Looking at the run rate now, it’s running about 1%-ish, and then in the second quarter it’s kind of flattish. I’m just wondering whether you still have that kind of confidence to maintain that 3% mobile revenue growth for the full year.

My second question is actually also related to that property development. You gave out the guidance about TWD1b earnings, potential earnings, in the next four to five years. I just want to get a sense whether that is a [leaving] income that you will be receiving, i.e. would that TWD1b going to be recurring every year or would that TWD1b going to be a one-off thing, i.e. it would be spreading out over several years.

And the last question is just related to the ADSL subscribers. I’m looking at the last couple of months. The net adds seems to have slowed down a bit. Year to date you are adding about 180,000 ADSL subscribers. I remember you mentioned about 500,000 net adds for the full year. Do you think you will be -- you will still be able to achieve that for the full year? And, if so, what kind of incentive are you planning to give up for the ADSL subscribers? Thanks.

Simon, can you clarify your second question? Not really clear.

Right. The property developments, you mentioned about TWD1b earnings for -- in terms of earnings contributions for Chunghwa Telecom. I’m wondering whether that TWD1b is per-year figures, i.e. you’re receiving TWD1b leaving revenue or leaving income every year or would you -- would that TWD1b be spreading out over five -- three to four or five years, i.e. probably TWD200m and TWD300m per annum? Thanks.

Okay. Regarding the first question, whether we are able to maintain our expectations to have a higher growth of our 3% of mobile revenue. Well, we thought the market was more optimistic than what it really is as we see today. The market is quite saturated in Taiwan and the competition is very, very intense. Under these kinds of circumstances, Chunghwa Telecom is still able to have about 1%, 1.7%, depending on which GAAP we follow, growth in revenues. This is quite an achievement comparing with other operators in the market.

And as we presented in some of the slides on the mobile operations, valued-added services are very important to us and we are very, very focused on promoting our value-added services. For example, mobile Internet, the growth rate was 41% during the first half of this year. So we’d like to see more use of value-added services. So we still keep our fingers crossed for the second half of this year, to see if we are able to have a higher growth rate on mobile operations.

And your second question as to the property developments. As I mentioned earlier, that this TWD1b earnings could be spread out into a number of years because all these property developments, especially if there are constructions involved to construct high-rise buildings or even in the southern part of Taiwan, in the resort areas, Kenting National Park, we have a project to construct hotel. This will take a few years to finish and then start to operate, or the high-rise building starts to sell, or maybe we can -- we may have some pre-sale activities from our contractors.

And all these earnings will be realized towards the end of the construction period or will be generated after we finish the construction and start operating all those properties. So it’s going to be spread out in three to four years.

Okay. About the third question?

ADSL.

The ADSL. Our target for this year is about half a million, 500,000 net adds. And from the results we have for the first half, we need to work very hard. Let me tell you. It’s already a saturated -- [somewhat full] saturation in the market. And we need more effort to stimulate the market. Okay? So we will work hard and, if not 100%, maybe close to 90% of the target. Okay?

Do you mind if I just follow up on the property? Are you thinking of actively selling the property as well, rather than redevelop the property, maybe just sell the land to a potential buyer?

Well, our current –- we are reviewing, as Chairman Ho-Chen mentioned earlier, we are re-zoning our land use. Okay? And before this is finished, we can only pick up those land that are eligible for development. And we treasure our fixed assets. And we may sell if it’s really some very special piece of a small piece of land in the corner of the street or it’s really not to be considered as a value, then we may sell it. So currently we have no intention to purely sell the land.

Thanks very much.

Next question. Go ahead, please.

Hi. It’s Shirley Tse from UBS. Thank you very much for the call. I have two follow-up questions to your earlier conversation. First is on the land sell, the revitalization of your fixed assets again. So are you -- just to clarify, so right now your preference is to co-develop the land that you own with developers, rather than to dispose of the land in a large-scale format? And whether, in such co-developments, do you -- are you going to invest any capital into the development or that you’re giving out land use?

And secondly, if you have an estimate of how -- of the amount of land that you have right now that is available for this type of usage and what’s the value of the land?

Secondly, on the broadband side, with your 500,000 net adds assumption, what’s your expectation of the ARPU level? Is it going to stay flat for the remainder of the year? And if you see that there could be any regulatory pressure for you to lower pricing on broadband?

Okay. The revitalization of fixed assets project, as you said, yes, we co-develop these developments. Okay? And we contribute the land. Okay? And no capital investment, no other capital investment will be involved from Chunghwa Telecom. Okay? And we have identified about 10 locations, about 10 locations. And we have selected -– we have started out with two, and developers have already been selected. And our Board of Directors have approved on those two pieces. Okay? So until now only four pieces are firm. Okay? And I don’t have the value of the land with me here. Maybe my colleague will help me there.

As to the ARPU for broadband access and broadband service throughout the year, we expect that the ADSL ARPU will be about TWD754 for the whole year, average, TWD754.

And the book value for the -- okay. Very preliminary information regarding the size of the land available for development. It’s about 10% of our land. Okay? And the book value of the land is about TWD100b altogether.

TWD100b for all your land and around 10% is available for redevelopment?

Okay, yes.

And you mentioned the broadband ARPU would be around TWD754, so that would be assuming that it’s flattish. So you don’t see that there could be some regulatory pressure to lower pricing?

Well, I don’t know. Maybe you have heard something from NCC. NCC published a statement or they announced a request for comments or request for information related to the X value in the price cap part of the tariff, part of the -- they are going to reveal all this X number. May come up with new rules for price cap policy. And this is going to take a while and I don’t know when NCC is going to finalize all this tariff review.

Okay, great. Thanks very much.

Thank you.

Next question. Go ahead, please.

Hi. It’s Tim Storey from JP Morgan. Thank you for the call this evening. I have two questions related to some topics already discussed and the first one follows on quite nicely, I think, with regard to what the NCC is looking at. The action plan which was published a few months ago indicated some very specific targets for market share that Chunghwa Telecom should be aiming to achieve from the NCC’s perspective over the next three or so years. I’m wondering, obviously, with those numbers being much lower than where your current market share figures are for things like broadband or local loop, how do you recommend we, as analysts, use that information from the NCC at this point in time? So I’d be curious to hear your thoughts about the use of those specific market share targets and the way we think about Chunghwa Telecom.

The second question goes to the issue of CapEx, and obviously guidance this year of TWD26b is very straightforward. I’m wondering if you can talk a little bit about your next-generation network investment plan and to what extent there’s a possibility, as you start to look at that, we see another rising cycle of CapEx as you accelerate your fiber-to-the-home build out and other improvements to bring it to a next-gen network. If you can give us a bit of guidance with a slighter longer-term timeframe, maybe over the next three to five years, in terms of what things you think might be affecting CapEx, either upwards or downwards, that would be very helpful. Thank you.

Okay. Thank you, Tim. Very good questions. The first one is about the NCC’s action plan. They did mention about some target market share for Chunghwa Telecom. I’m also very much interested in their thinking about market share. My first question is really the definition of the size of the market. What’s to be included in their definition of -- for example, local [technical difficulty] service has to be included in the definition. And then it seems to me that the traffic is more important, is more meaningful. Measuring the traffic or revenue is more meaningful than measuring –- or even revenue’s not that -- very appropriate because somebody offers service with [inaudible].

So, when you consider competition in fixed line or ILD, that could be included in your measurement. So, we have expressed something like this to NCC before and bring their attention how to effectively measure market share in this very diverse or very well developed different -- all kinds of measures available for certain kinds of service.

We would argue with NCC about their definition and -- for example, broadband. Okay. What is the definition of broadband? Would 3G users [inaudible] 4 kilobits per second higher than 256K to be included as -- to be considered as a broadband access service or others - WiMAX, Wi-Fi, all this kind of alternatives.

So I’m really curious about how NCC is going to measure so-called market share. And we also put it very clearly when fixed line is concerned. We argue that, because of the quality of our service, I don’t believe many of our customers will turn off their fixed line connection because this is considered to be a lifeline. We are able to offer lifeline service. This will not be the case for others. So counting the subscriber numbers really is not proper, the right thing to do. Maybe they have other measures to communicate, but they must maintain [inaudible] fixed line, or lifeline. So this is a very, very interesting issue and we would like -- certainly like to have the chance to talk to NCC commissioners.

And our CapEx, and you mentioned about the NGN. You probably have heard from the newspaper that we do have a program to deploy NGN over the next five, six years. And the CapEx altogether, this is again a preliminary forecast for the budget required for NGN. It is something like TWD54b over six years. You have [saw] this from the newspaper. And this includes two major parts. The first part is core network amounts to about TWD10.7b or TWD11b. And broadband, including broadband access, fiber-in-the-loop, fiber-to-the-home, fiber-to-the-X, about TWD43b. All this added together amounts to TWD54b over six years.

And I mentioned about this to be a very rough estimate because we don’t know exactly how much it costs when the time arrives to place orders. But there will be variations and we also believe, with the deployment of the many carriers or operators deploying NGN network infrastructure, the price will come down. And we really would like to see the same thing happen in NGN products as we have in ADSL. As time goes along, we hope price will be dropped significantly.

Tim, if I may add on your first questions, I would like to elaborate more about the so-called definition of the market and the way they measure. I would positively think of this as probably NCC would like to see a bigger market which is including cable as the possible so-called triple-play cable phone. And by narrowing that we will see a bigger pie than we will see, safely to stay those lifeline customers with us, but somebody will provide the so-called cable network as accessibility for those [inaudible] phone calls.

So if this is the case, then we will see the quality for the future provision and also the definition of the market. So we don’t really worry that much about the shrinkage of the market. And that’s the spirit we hold to communicate with the NCC commissioner so far. Thank you.

Thank you very much for both those detailed answers. Very helpful. Thank you.

Next question. Go ahead, please.

Hi. This is Elinor Leung from CLSA. I have two questions. I think the first question is, is there any plan to do another share buyback? What is your current foreign shareholding for Chunghwa Telecom at the moment? And after the government sells out its share further, will you reach the limit again, the [inaudible]? Would that limit your share buyback ability?

And the second question is regarding your operating costs. Your operating cost difference between U.S. GAAP and ROC GAAP is around TWD5.9b and I understand that TWD2.9b is due to the early retirement program as well as the employee bonuses. What are the causes that make up this difference? Thank you.

Okay. Regarding to the operating costs, the difference between U.S. GAAP and ROC GAAP, as you mention, is about TWD5.9b. This comes in with TWD2.3b of compensation expenses related to the early retirement programs, TWD1.55b of employee bonus and TWD1.2b of performance-based bonuses. And this added together is about TWD5b, yes.

Thank you.

Okay, thanks.

You are on the line. Go ahead, please.

Sorry, the first question I haven’t responded yet. Sorry about that. Your first question regarding the current foreign ownership limit. We currently have been allowed to proceed to 49%. So currently we have 47%, 47.4% in reserve. So I believe after this further offering we still have room for a further share buyback.

Hello?

Go ahead, please, sir.

Hi, hello. This is [Tim Davis] from GIC in Singapore. I’ve just got one question just on your -- on the quarterly trend in your operating costs. In general, looking down all of your operating costs, they were either down or below the rate of your revenue growth. In particular, I think the marketing expenses and the G&A expenses were both down Q-on-Q. Could you comment what the trend is likely to be in the third quarter and the fourth quarter? And is that trend going to continue or were there some one-offs -- one-off benefits in the second quarter?

Regarding to the operating costs, we believe we manage our costs quite reasonably and we -- the operating costs of this first half remains about the same -- under ROC GAAP remains about the same as last year. And for the third quarter, fourth quarter, I believe it’s pretty much stable. We don’t see significant changes or any surprises in operating costs.

And overall, would you think your operating margin will be stable in the third quarter and the fourth quarter versus the second quarter?

Pardon me?

Do you think your operating margin overall will be stable in the third quarter and the fourth quarter versus the second quarter?

We believe the operating margin -- the fourth quarter will be a little bit down and the third quarter will be a little bit higher, yes.

Okay, thank you.

Okay, thanks.

You are on the line. Go ahead, please.

Hi. It’s Helen Zhu from Goldman Sachs. A few questions. First, I’m sorry, I just wanted to ask a follow-up to Elinor’s question regarding the share buybacks. I was having a bit of a phone problem so I couldn’t really hear. You mentioned something about there’d be enough room to do further share buybacks. I was just wondering whether you’ve factored in the shares to be sold in the ADR in that calculation, and how much room you would think there would be to do further share buybacks.

The second question is with relation to the early retirement program. You had mentioned earlier that there wouldn’t be any further retirement programs this year. Is it on the agenda to consider for the first half of next year? And assuming you offer a package similar to this year’s package, how many people do you think may actually depart?

And the third question is with regard to bundling. Is bundling actually legal? There is some mentions of bundling in the presentation earlier and we had heard that bundling of various services across your product suite is being challenged in terms of legality. Thanks.

Okay. Let me take the last two questions first. Or let me take third question first and then the second question. And the Chairman will have the first question. Yes, in our presentation we mentioned a small number of [operators] that we mentioned about bundling service or bundled services. All these services are approved by the regulatory body, so it’s not something that we just [discretionarily conducted]. It’s been approved. Okay?

Regarding the [inaudible].

But at this time you have no approval -- sorry.

Excuse me?

I was just going to ask is it the case that each time you offer a new bundled service you have to apply separately?

Yes. Yes. We need approval for all these packages, yes. Related to the human -- or the headcount [inaudible] in the remaining of this year there will be no ERP, okay? And whether we will have another one next year, as I said earlier, we have already started planning our next year’s [inaudible] plan and we will take this into consideration whether to conduct another retirement package or not. And this has not been decided. So to what extent we offer it, it’s not [set] now.

Referring to the first question, I would like to clarify the possible room for further share buyback will happen. MOTC already lifted the foreign ownership for Chunghwa Telecom up to 49%. And if we completely sell down the current government shares, which is 7.3 to 7.4%, we still have about 1.6 or 1.7% as a room for a further share buyback. And even -- and also the reserve, the amount, say 7.4% for the sell down, probably will not fully materialize sometime during the future domestic market. So I think there’s still room for a share buyback. Thank you.

Can I confirm - for the 7.4%, are you saying it may not all be sold into -- for ADR? Or are you saying that the total for ADR and domestic may not reach 7.4%?

That 7.4% including domestic and the ADR offering.

The total may not be as high as 7.4%?

Including if other shareholders are going to participate in ADR. Otherwise this is about the size from government. Did I clarify that?

[Inaudible].

If you still have further query, I will ask IR to contact you on that. Thank you.

Okay, thanks.

Next question. Go ahead, please.

Hi, sorry, this is Kathy Tune from Goldman Sachs. I also have three questions. The first one is on your SACs. It seems like the SACs came down quite a bit sequentially, which is similar to what your competitors saw as well. Can you just give us an idea if you expect that these SACs will be sustainable in the second half?

The second question is you mentioned during the presentation that you’re open to doing a cap reduction or share buyback if you don’t see other suitable investments. Can you talk about what kind of investments you’re looking out for, what criteria you have, and if there’s anything you’re currently considering?

The third question is on VOIP. On the same slide you talked about VOIP [technical difficulty] will be launched in due course. Can you give us an idea of when you plan to launch it and if there’s any obstacles that you need to deal with before you can actually launch the service?

Your first question is about the SAC of our mobile service, is that right?

Yes.

Okay. The SAC, we categorize two categories. One is second generation GSM and the one is for 3G, okay? Our SAC for 2G and GSM is about TWD3,100, okay? For 3G it’s about TWD5,500.

Okay, your second -- your third question is on what, is on VOIP?

Actually just to clarify that first one. So do you expect the SACs to stay at similar levels in the second half of this year?

Well, the SAC probably will stay similar in second half as to the first half.

Okay. And then my third question on VOIP was on the presentation it said that you plan to launch VOIP in due course. So I was wondering if you could tell us a more approximate time when you expect to be able to launch this service and if there’s any obstacles that you need to deal with before you can actually launch the service.

Okay. VOIP is a generic term and actually in our HiNet service we have one version of VOIP which is already available. And for our previous account, for those who make use of our VPN or IPVPN, VOIP is already included in the package. Okay? And for the so-called regular VOIP, that’s as far as numbering allocation -- number allocation from the regulatory party, people talk about 070, this kind of numbering trend for VOIP, we have already submitted our request to NCC for approval of our project. And we are still working on this with NCC. And up until now NCC has not allocated any reserve numbering for VOIP yet. No company has received any allocation -- official allocation from NCC for VOIP.

Could you repeat your question number two?

Yes, it was the comment that you would be open to doing share buyback and capita, reductions if you don’t find other suitable investments to return value to shareholders. Can you give us an idea of what kind of investments you would be looking at? What criteria and if you are currently considering any investments.

Regarding to other means to return value to shareholders, certainly strategically investment is the way. But I believe this is the way CAT has to learn from the current situation. That’s why we are getting an investment division to be responsible on that. And also we would like to see more strategic partners through our vendors and other content providers. Those are the ways we try to reach out and also to cultivate our professional to manage the likely opportunities. I wonder if this clarifies your concern, or we have to be more [inaudible] through writing?

No, that’s fine. Thank you.

Thank you.

If there are no further questions, I will turn it back over to Chairman Ho-Chen.

Thank you for attending. Thank you for support. Good evening. Thank you.

Thank you, Chairman Ho-Chen. [OPERATOR INSTRUCTIONS]. We would like to thank you all for the time and thank you for using Chunghwa Telecom audio conference service. You may now disconnect your line. Good night.