Chunghwa Telecom Co Ltd (CHT) 2006 Q3 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company Q3 2006 operational results. During the presentation all lines will be on listen-only mode. When the briefing has 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 Chairman Ho-Chen Tan, the host of the conference. Thank you. Chairman Ho-Chen Tan, 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 us for third quarter 2006 earnings results conference call. We'll begin this call by having President Lu take you through the review of our financial and operating results. Following that I will step back in and go through our Company's strategy. At the end of the presentation, President Lu and I will be happy to take your questions. Before we begin, please note our Safe Harbor Statement on the following slide. Go ahead.

Okay. Thank you Chairman Ho-Chen Tan. Now let us move on to the financial results for the third quarter of 2006. First, I would like to explain the different accounting [checking] for U.S. and ROC GAAP as regards our third quarter results.

Since we have acquired a 70% ownership of a local [inaudible] operator, [Chick] Telecom in September, we are required to report the consolidated financial segments quarterly under U.S. GAAP. This is not the case for under ROC GAAP. Under ROC GAAP only semi-annual and annual financial reports are required to report consolidated numbers. In addition, under U.S. GAAP we set aside 10% for undisputed earning tax on our undisputed after-tax earning for employee bonus. In relation for director and the supervisors and we recognize that this counts for employee [inaudible] of expenses. ROC GAAP does not resolve for these items in the reporting.

Furthermore, compensation for the early retirement program, or ERP, is capitalized of certain expenses under ROC -- under U.S. GAAP. But it is typical of outright expenses under ROC GAAP. The different accounting systems used to differing financial results will be presented in the following slides. This is also a good opportunity to reemphasize that here we use ROC debt to calculate our dividend.

We are following along with the slides. I will now move on to slide number four. On the right-hand side of the slide, we provide the financial data under ROC GAAP, which seems to me to be more relevant to our operations. Under U.S. GAAP, total revenue for the first nine months of '06 were TWD138.8b, which is a 0.2% increase year over year. This was mainly driven by continued growth in the Internet Data and the Mobile segments.

EBITDA for the first nine months '06 decreased 3.4% year over year, to TWD71.3b. Operating profit decreased by 5.2% year over year to TWD40.8b. And consolidated income decreased by 14% year over year to TWD30.9b. The decreases were mainly due to the increase in the compensation expense for the ERP and the employee bonus.

On slide number five, we show quarterly figures to comparing Q3 '06 is Q2 '06. Revenue increased by 2.2%. EBITDA increased by 5.7%. Operating profit and consolidated income increased by 10.2% and 6.6% respectively, mainly due to the seasonal nature of our business and the big increase in employee bonus.

On slide number six, we take a look at our segments of business. In comparing the results for the first nine months of '06 and '05 under U.S. GAAP Internet sales have rapidly increased 11.3% and 6.3% year over year respectively. Internet revenue increased as ADSL subscriber numbers continue to increase and the upgrading customers from [Grosetint] to [HaleC] broadband services grew successful.

Mobile service reported a 0.5% growth year over year, mainly due to the increase in postpaid subscribers and value added service revenue. However, because it decreased our tariff for Mobiles and fixed calls in December of 2005 and [inaudible] take of this. The growth in mobile revenue was adversely affected. In the six months business, local revenues decreased by 6.9% year over year, mainly due to Mobile and Broadband substitution. In this long distance revenue decreased by 9.6% year over year, due to mobile substitution and the VIP. International long distance revenue decreased by 2.8% when compared to the first nine months in '05 owing to the decrease in unit price which was due to calls per minute of [inaudible]. Total ADSL minutes increased. Business segment revenues based on ROC GAAP are also presented on the right-hand side of this page for your reference.

Now on slide seven for the quarterly revenue results. Internet revenue were TWD9b, a 2.8% increase quarter over quarter. Data revenue also increased gaining 3.7% Q over Q, to TWD2.7b. Revenue for the Mobile business increased by 2.3% Q over Q to TWD18.7b, while our Fixed Line revenues decreased by 1.1% as compared with the previous quarter.

On slide eight, you can see that our growth areas continue to account for an increasing portion of total revenue. In comparing the revenue composition from the first nine months of '06 to the same period in '05 Internet and Data revenue increased from 22% to 24% of our total revenue, while Mobile revenue remained 40% of total revenue.

Under U.S. GAAP, total operating costs and expenses for the first nine months of '06 increased by 2.7% year over year. As mentioned earlier, this was mainly due to the increase in the compensation expense for the ERP and the employee bonus. The expense for employee bonus included in the recognition of price difference between the par value and the market price for 2005 employee [staff] dividend of TWD1.15b and the provision of employee cash bonus for 2006 of TWD683m.

On slide number 10, for the third quarter, operating costs and expense decreased by 1.2% quarter over quarter. This was also due to the decrease in employee bonus as compared to the second quarter.

Moving on to slide number 11, the CapEx. The CapEx for the first nine months amounted to TWD18.5b, which was a 16% increase when compared to the same period in '05. The main reason for the increase was higher spending in the Mobile segment, especially the spending related to the extension of our 3G network.

As you can see on slide 12, our cash flow from operations remains strong. It reached TWD68.5b for the first nine months in '06 compared to TWD56.3b for the same period in '05. As of September 30 of this year our free cash flow from operating activities totalled TWD50b, a 23.9% increase when compared with September 30 of 2005.

Now, let's move on to the business review. We will start with Internet and Data on slide number 14. Subscriber numbers for Broadband, including ADSL and FTTB, was about 4m as of September 30, '06. This was in the past 11.7% year over year increase. The number of subscribers for 2 megabit has been the highest. It accounted for 61.9% of our total ADSL subscriber base, compared to 58.2% in September of '05.

ADSL subscriber growth is slowing. The number of FTTB subscribers is steadily increasing. The total revenue from Broadband access service for the first nine months in '06 increased to TWD14b compared to TWD12.2b in the same period of '05. This solid 14.8% increase was primarily as a result of us since April to migrate customers who have ADSL and FTTB services and an increasing overall subscriber numbers.

We continue to maintain a commanding position in the Taiwan broadband market with a market share of more than 85% at the end of September '06. Exceptionally, about 80% of our ADSL subscribers also use our high net ISP service, accounting for an increase in revenue within our own customer base. We have launched a trial service for 10 Mbps. We have taken fiber to the field [and service].

On the chart on this slide you can see that the subscriber number of our FTTB service increased significantly on a quarterly basis. At the end of September '06 we had 88,300 FTTB subscribers. In order to respond to subscribers' demands for faster speeds, we are ready to launch 50Mbps and 100Mbps FTTB services at a reasonable price in the near future.

On slide number 16, we show the results of our aggressive promotion of our 3Mbps and 8]bps ADSL services. In the chart on the left we show that the average bandwidth per user was 2.49Mbps at the end of September '06, which was an increase of 22.7% compared to September of '05.

Our ADSL ARPU for the first nine months was TWD760 per month, which compares to TWD781 in the same period of last year. The decrease in ARPU was due to our promotion of a 256Kbps package and a loyalty program discount. However, the Company continues to upgrade the service from low speed to higher speed, which helps mitigate the downward pressure of ARPU.

Now I would like to move on to our Mobile business on slide number 17. At the end of September 2006, our total number of 2G and 3G subscribers was 8.4m. Our market share of 2G subscribers was 41.1% and our revenue share was 35.6% for the first nine months of '06. Both are the highest in the market. We are also happy to report that our 3G subscriber base continues to grow. At the end of September we had 597,000 3G subscribers. Our ARPU was 59,000 subscribers. Was TWD1,900 in September. Of this, 32% was from value added services.

Additionally around 15,000 handsets were sold from July 3 to October 17, among which 61% are using email service.

In addition to our 322 service centers we have additional 102 stores, exclusively serving Chunghwa's customers. These stores are managed in cooperation with handset distributors and are generally unraveling by acquiring new customers, as well as by providing additional evening-hour services to our customer base. From July to September young subscribers below 30 years was about 47% of Mobile subscribers served by these stores.

On slide number 18, we show that our branded ARPU was TWD736 for the first nine months of '06, a decrease from TWD744 when compared to the same period in 2005. AMPU in the first nine months of '06, increased 1.6% year over year. We are also happy to report that our blended churn rate for the first nine months of '06 decreased 13.3% to 8.9%. In addition, the churn rate for postpaid subscribers was only 7.8%. These results are mainly relating to our seamless coverage, high quality network, accurate PB systems and the comparative promotional package.

Mobile value added service remains the primary focus for Chunghwa, as you can see on slide number 19. Mobile value added service revenue for the first nine months in '06 was 31% higher than the same period in '05. This mobile Internet service experiencing the highest growth.

On page 20, currently the average monthly fee from 3G subscribers is two times that of 2G subscribers, whilst 3G ARPU is 52% higher than that of 2G. The VAS ARPU for 3G subscribers is 47.5% higher than that of 2G subscribers. At the end of September '06, 38% of our 3G subscribers were using 3G handsets. We expect 15% of 3G subscribers to have 3G handsets at the end of '06. Among all 3G subscribers, 77% migrated from our own 2G service, which really is a very solid migration record.

Our mobile bundled services, including Energy plan and F-2 proved to be well received. We started to offer our Energy plan in April of this year. By choosing the Energy plan the subscribers can enjoy free traffic for mobile on-net calls. Off-net calls and calls from mobile to fixed lines was [driven] [inaudible]. In the upper half of the slide, subscriber numbers for the Energy plan experienced a significant growth with a CMGR of 39% from May to September.

And choosing F-2, subscribers can enjoy a significant discount or, a group of fixed line and 10 mobile numbers. In the lower half of the slide subscriber numbers of F-2 have kept growing from January to September, totaling 1.8m by the end of September with growth rate of 1.2% per month. At the end of September, subscribers choosing the Energy Plan reached 208,000 and F-2 subscribers represented 21% of our total mobile subscribers. [Cheap] bundled service helped to enhance customers' loyalty in subscriber growth for both the Energy Plan and F-2 is quite healthy for our mobile business.

In Fixed Line we have defended our much leading position, despite market liberalization in voice local to unbundled. Our market share remains strong. Now I would like to hand over to Chairman Ho-Chen Tan for our Near Term Business Strategy.

Thank you President Lu. In conclusion, I believe our strategy is quite clear. Let us highlight the key aspects of our near term strategy.

First, in our core businesses, we will continue to focus on improving our leadership position in each of our business lines. In our Mobile business we will speed up the adoption of our 3G services and VAS offerings, such as personal ring tone and mobile Internet.

In our Internet and Data business, which has been a strong driver of our growth, we intend to continue to grow our subscriber base while migrating high end customers to fiber and bundled broadband and wireless Internet. We will also focus on promoting the growth of our IPTV subscriber base and increase content in service offering on our platform through alliance with high quality content providers.

In Fixed Line we intend to maintain our comprehensive coverage and the lead in market share while investing in next generation network, which will ultimately decrease our network costs over time.

Across all of our businesses we will continue to strive to offer the highest quality customer service, which we believe differentiates us from our competitors.

Second, we are promoting convergence through bundled service offerings to include integrated enterprise solutions and mobile fixed and mobile broadband digital home bundled service.

Third, we remain fully committed to maximizing value for shareholders. We intend to continue to maintain our high dividend payout obviously. We have also demonstrates, such as through our 2% share buy back earlier this year, that we carefully consider capital management initiatives such as share buybacks and potential capital reduction to enhance shareholder returns. We also intend to optimize property assets to generate additional returns. As a privatized entity, we have greater flexibility to implement these initiatives.

Lastly, with regard to the newly formed regulator we will continue our active dialog. We believe CHT is best positioned to capitalize on opportunity due to the change. That concludes our presentation. Now President Lu and I are happy to take your questions. Thank you.

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

Yes. Hi. Good evening. My name is Anand Ramachandran calling from Citigroup. I have three questions, Sir. Thank you so much for the call. Firstly I was looking at the marketing expenses, which are up quite significantly quarter on quarter and year on year, and they seem to have contributed to a lower EBITDA margin for the quarter as well. I was wondering whether there's something seasonally here or any extra costs that you've spent.

Secondly, I was looking at the ADSL addition rate, which you indicated had been slower than what you expected. I was wondering whether you're still sticking to your target of 500,000 additions for the full year.

Thirdly, the NCC has announced some initiatives for tariff costs on the fixed line and the data business. I was wondering if you could provide us with some color on what your take on that situation is. Thank you.

Okay. Let me answer from backwards. The third question is related to the NCC initiatives, related to the price cap for certain businesses. NCC has announced that they are going to conduct a Hearing on this issue. We've got the current data and we believe the major operators have some needs. Their opinions or feedback into NCC and consumer telecom, we said this in our report. We have no idea when they will finish their internal work and reach a decision on the new tariff for the price cap regulation for certain businesses.

And your second question is on ADSL. We believe this year our net adds would be about 380,000, okay. Net add for ADSL this year will be about 380,000.

The first question related to the marketing expense. We see until the end of September we have accounted for about TWD1.2b extra amount in addition to what we spent last year. This is under U.S. GAAP. Okay. This is trend in what's going to be carry on for the end of the year.

But let me give a little more detail on our handset subsidies. We reduced our handset subsidy for 2G subscribers from TWD2,193 in '05 down to TWD1,972 in '06. And also the handset subsidy for 3G also decreased from 6,500 to 4,370. So we managed the average handset subsidies to our subscribers. And, of course, we're very conscious on how much we spend on the handset subsidies.

Sorry sir but can I check the lower margins year-on-year, if I look at ROC GAP third quarter margins last year. If I look at EBITDA margins they're around 59% and it's about 54.3% this year. So the difference is essentially higher marketing costs and most of it is due to handset subsidies?

Well, EBIT -- regarding to our performance for the whole year of this year, please refer to the guidance that we offer earlier this year in April. We believe we would be likely to maintain the guidance we offered to you earlier this year.

Okay. Thanks.

And the effective tax rate, this probably also is one area that we are very much concerned about. Under ROC GAAP, the effective tax rate until end of September for this, the first three quarters, is about 22.5% and we believe with the second incentives that normally occur during the fourth quarter, the effective tax rate for this year will be about 22%.

Okay. Can I just -- sorry one more follow-up question, sir. Assuming the NCC does implement tariff cuts of some kind, assuming that happens, it would be reasonable to assume that there would be some impact to operations or do you see something on the cost side that you can do to minimize that impact?

Well, NCC reports on certain initiatives and, for example, they would like to improve -- to manage your market share in certain businesses, for example, Broadband. Well, we believe this is not a good idea to oversee Company's market share because we believe it is customers' choice of operators to serve. If they do something like this, the Company, and we have proactively responded by migrating our customers, high speed customers from ADSL to fiber solutions and fiber is not included in the earlier calculation of the market share in Broadband. And so likewise, in 2G, DSM service we have tried to cap our price to 2G service and we are also have already started migrating more aggressively subscribers from 2G to 3G. And overall if price cap or price control is implemented and the Company would like to plan ways to defuse the impact from this new regulation. And, for example, we want to manage our marketing expense so that our total return for customers would be rationalized.

Finally, Anand, your concern about NCC. Following President Lu's comments that we can feel that NCC now is encouraged the traditional carriers to move more aggressively into so-called new areas, especially for those areas that need technology convergence. So that's why we highlight that point as our comparative advantage to materialize this kind of opportunity even if this is regulations.

Secondly, when we're talking about we tried to proactively start our dialogue with NCC which means we don't only restrict ourselves to dialogue with them through the so-called formal sessions. We tried to convene meaning of the conference, which can give us more kind of flexibility to dialogue with them without a formal commitment. We can talk about technical decisions and possible business areas with those technical discussions. So this is the way we try to make our point more clear through many channels. That will make us a better channel better opportunity to convince NCC on the regular -- on regulatory law. Thank you.

Thank you so much, sir.

Next question, go ahead please.

Hi. This is Danny Chu from Lehman Brothers. I've just got one simple question. It's can you talk a little bit about your IPTV plan is? What is your targeted subscriber base for the IPTV in the first year of rollout and what would be the target ARPU you are aiming at during the first year for a while? Thank you.

Well, our IPTV service, currently we have over 200,000 subscribers of -- over 200,000 subscribers. Our year end target we set earlier this year is about 240,000 subscribers. We are likely to achieve or even surpass this target number. Okay?

And any rough idea what is the targeted time it takes for that business to be EBITDA break even? Thank you.

The IPTV business in Taiwan is still at the early stage. Currently we offer 33 channels plus about 4,500 titles. We are working very aggressively to acquire more front end and applications. The breakeven point, for this business requires two factors. One is the increase in number of subscribers and also the increase in ARPU. We believe if we have about 125m subscribers with ARPU up to 350, then we will have -- we will reach a breakeven in operation. And our estimate for this is around year 2009.

Okay. Thank you.

Okay, thanks.

[OPERATOR INSTRUCTIONS]. You are on line. Go ahead, please.

Hi, this is Terry Chan from Credit Suisse. Can you please give us some update or color on your capital management plan? And also, do you have any guideline on the effective tax rate on U.S. GAAP? Thanks.

Let me answer the second question first. We are -- the effective tax rate, under U.S. GAAP for the three quarters of this year, it's about 28%. 28 to 29%. It's relatively high because of the elements that I mentioned earlier in the early part of my presentation because under U.S. GAAP we set a 5 to 10% for undistributed earning intake on our undistributed after tax earnings. This is quite significant with our numbers. So please refer to the ROC GAAP for effective tax rate because this is the first time we've calculated our dividend. It's -- and I mentioned earlier in answering the first question, the effective tax rate for this year under ROC GAAP would be about 22%.

Okay. Thanks.

Yes.

Your first question relating to the capital management scheme. Let me just emphasize again, the Company is committed to maximize shareholders' return and there are many ways but I believe one of your preferable way like capital reduction is certainly one way to deliver our commitment. The Company now is working with Government authorities, especially for the Ministry of Economic Affairs and also Financial Supervisory Commission regarding the uplift of the 10% cap per year to increase capital from capital surplus. However, you can see, as National Enterprise before, it certainly takes time for Government to review our proposal.

And, secondly, try to take advantage of the Government's law revision especially on the company law recently. We will take the opportunity to propose to Government regarding the possibility of having a special dividend directly from capital surplus. If this happens, it means the Company will be able to return extra cash from capital surplus to shareholders directly. Those efforts, regarding to negotiation and timing law revision will be our target to materialize capital reduction as soon as possible. Thank you.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. You are on line. Go ahead, please. You are on the line, go ahead please.

Hi, it's Helen Zhu from Goldman. I just wanted to follow-up on the mention about the special dividend possibility. How would that work exactly? Can you give us a little bit more detail? If the regulation can be lifted, which regulatory body would make the decision? Would you be able to pay special dividend up to the amount of your capital surplus? Would it have any kind of ramifications on your -- I guess it wouldn't have any ramifications on your dividends. What would be the tax treatment etc.? Do you know of any precedent cases for this?

I can only respond to the Government body for this issue. If we are looking into, looking for the possibility to have that special dividend directly from capital surplus, then the related company law should be revised. And the Ministry who govern this exercise is Ministry of Economic Affairs. So we are now working with them to see if they -- once they already start a plan to revise that company law as a whole then we should propose some of the revision for the related item. That can give us a possible opportunity to have the special dividend directly from capital surplus. So this is the process and through that I believe we will have a more direct capital reduction and also return the cash to shareholders. Thank you.

Would that amendment of company law require legislative U.N. approval?

Yes. Yes, and this, to us, this is not precedent for special dividend occurring in this country before. So it will be one. We will be the first one to offer such a special dividend.

Please be patient and you will have a good return. Thank you.

Could I ask a follow-up question? It seems like in the past year there are usually a lot of increase in cost items in the fourth quarter leading EBITDA margins to decline at the end of the year. To what extent do you think that seasonality will be evened out somewhat this year? As in should we expect a similar amount of margin decline in 4Q '06 as we saw in 4Q '05, or do you think it will be more stable and more even throughout the year?

This is a very important question I believe and let me answer your question by saying that our internal estimate for the fourth quarter, the cost for fourth quarter, for this year, would be about the same as the cost, the operating cost, for last year, the fourth quarter. So please take this as your reference. And, as I said earlier, that the management would do our best to maintain the guidance that we offered in April. So we believe this will serve as a good reference for you.

So you think on an absolute basis, last year I have TWD34.3b. So that means fourth quarter '06 operating costs, including depreciation, will be roughly about TWD34b as well?

Yes. You are quite -- you are right. You have all the data.

But that would imply a big jump in cost of services for the fourth quarter as well right?

We all saw in look into revenue decline for the fourth quarter because of the four environments here in Taiwan that we put a slightly conservative figures for our revenue in for the fourth quarter. These were -- that's why I said that please refer to the guidance in -- we announced in April for this year's results. Okay.

Okay. Thanks.

You are on the line. Go ahead, please.

Thanks. It's Lina Choi from Morgan Stanley, I just want to follow-up with a regulatory question again. It seems like all the operators are trying to negotiate and doing rounds of feedback with the NCC. What are the legislative next steps that we should expect now that NCC has put out a formal proposal? What's the next step and what's the timing of the next step if we were to try to model some impact to operator's revenue then should we look at it in the last quarter of this year, should they be in the first quarter of '07 or in the second half of '07? Can the management give us some guidance? Thank you.

Well, according to what we gather from NCC, we believe it be their initiative to put the new regulation on the price cap formula. Their intention is to have this new law to be effective in April next year. Okay, this is related to the price cap part of this.

And you mentioned about the objective actions. I don't know whether you are.

Yes, what I meant is since these are a proposal from the NCC does that need to go through any kind of legislative approval? Can the operators do anything to delay this process? What is the time -- the milestones we're looking at?

Well, according to the separation of power, NCC is in position to get their own -- to develop their own decision -- to make their own decision, I'm sorry. NCC is in position to make their own decision. There's no need for the executive's approval of any of their initiatives. Okay, this is official statement.

So is it correct to assume once NCC says I'm determined to do this then all the operators would have to follow?

Legally, yes.

[Status] for the something related to the possible change of so-called industry policy. For example, the issuing of wire -- a license for WiMAX. This is the issue which is not related, directly related, to current fairness of competition. It's kind of a new business area and that is really have a structure impacted to the industry. Then the executive Yen may have opportunity to have a second look. But this is the kind of on call decision from Executive Yen, you said Yen so. Probably they won't step in, but this is one something related to the industry policy then they [abide by the rules]. Otherwise the regulatory issues, NCC will set their goal and timing on their own choice.

Thank you.

[OPERATOR INSTRUCTIONS]. You are on the line. Go ahead, please.

Hi. This is Kathy Chen from Goldman Sachs. I have three other questions. Firstly, just following up on the capital management side, would you, as far as excluding the possibility of transferring from your capital surplus, based on your current capital balance, you are able to return about 10% of the market cap to shareholders. In case there isn't any resolvement of any of these regulatory changes, would you still be willing to potentially return that 10% to shareholders?

And secondly, there was some news in the local press about Chunghwa potentially looking to invest in [Chennel] and I was wondering if there's any color on this as, other than [Chennel], are there thoughts on other potential acquisitions?

And the third question is can you give us an update on the outlook for Mobile growth?

I'll take the first question. The commitment for the Company is trying to maximize the return to the shareholders. So if we can only restrict it to have capital reduction for the so-called 10% cap per year or from the capital surplus we will think it will be kind of not very completely deliver our commitment. So we will try our best to see if we can have some way to uplift that amount in [fair] cap. So this is our effort. But if we do encounter those restrictions then we will see if a relatively smaller exercise still benefit the shareholders then we will probably will take but that's -- let's have some negotiation work with the Government first. Thank you.

Just a follow-up on that point. In terms of timing, previously during the ADR offering you've highlighted June '07 being the AGM shareholder meeting. Is there any outlook on if we can get an update before that date or an update before year-end?

Kathy, could you repeat the question?

Yes, just a follow-up on the capital management in terms of timing. I think previously during the ADR road show management was highlighting June '07 as the next AGM shareholder meeting. So can we expect an update or some kind of decision by June '07 or potentially before year end 2007?

The -- this decision will [inaudible -technical difficulty] given the [feeling] of ADR hopefully. I explain how this capital reduction could happen. I explained also various kinds of alternatives, okay, and I remember I didn't specifically say that it's going to happen by when because this year there are certainly many elements here to be looked into. And as Chairman Ho-Chen Tan, just mentioned earlier, that we need to talk to relevant Government agencies and also, if we want to have this special dividend on the capital surplus we do need to see if some amendments of Articles in the company law could be done. So we would like to pursue this. Do our best efforts and to be more specific about timing is a little bit difficult for us to be precise of this stage.

Relating to the outlook for the Mobile growth, we believe we are still in position to gain positive subscribers. And we estimate that by the end of the year we will have about 8.48m customers altogether including 2G and 3G. And the revenue for the fourth quarter of this year, for Mobile, should be about the same as the revenues for the fourth quarter of last year. Okay.

As we explained in the presentation, 3G in terms of ARPU and the contribution from value added services, 3G compared to 2G, we believe 3G indicated to us this is an area we ought to pursue and we have relatively aggressive targets for 3G in the future for the ramping. By the end of this year we would like to reach at least 800,000 3G subscribers and we plan to add about 1.2m new subscribers next year. 1.2 or even 1.4m, 3G subscribers next year and we do hope that both ARPU, value added service applications, all this will have opportunities to grow.

As to the distributor of handsets, the Company -- we believe currently we have very efficient ways to conduct this type of business and we have two major distributors of handsets today. And then we are monitoring very carefully about market situations because other operators have already taken some steps in establishing closer relationship with distributors. And we are reviewing whether we should do the same or stay as before. So we have no specific target at this stage here.

Thank you. If you don't mind, can you just give a follow-up on the target for 3G subscribers for next year? In achieving that 1.2 to 1.4m new 3G adds do you anticipate having to increase your level of 3G handset subsidies, or do you expect that to be able to either remain flat or decline assuming that 3G handset costs are also coming down?

The 3G handset subsidy, this is an element that we would manage it very dynamically, you know. As we explained to you earlier about the press kit based on Mobile service, we would consider the total [dependency] subscribers including in tariff, reduction or from handset subsidies. We intend to look at this as a whole package to our customers. So we will manage this very carefully and certainly in 3G handsets, the price of 3G handsets is also coming down. And the amount that we spent on each customer is also decreasing. I mentioned to you earlier that we are seeing great deals from TWD3,500 to TWD4,000 and maybe 370, we still manage. Okay. So we are very, very conscious about our spending on the customer side. I guess we need to also look up to our shareholders value.

Okay. Thank you.

If there are no further questions I will turn things over to Chairman Ho-Chen Tan.

Again, thank you for being with us. We will try not to arrange this kind of results call on weekend evening next time. Good night. Thank you.

Thank you, Chairman Ho-Chen Tan. That's all for today's conference call. Replay details will be available on CHT website at www.cht.com.tw. 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.