Chunghwa Telecom Co Ltd (CHT) 2007 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the company first half 2007 operational results. During the presentation, all lines will be on listen-only mode. When the briefing is finished, directions about making your questions will be given in the question and answer session.

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, operator. Good evening everyone, thank you for your patience. This is Tan Ho Chen, Chairman of Chunghwa Telecom. I would like to thank you for joining our first half and second quarter 2007 earnings results conference call. (inaudible) Dr. Shieh and President Lu take you through a review of our financial results in the business operations, then I will guide you through our near term strategic outlook. At the end of the presentation we will be happy to take your questions.

Before we begin please note our safe harbor statement on slide one. Next, I will review our company's first half highlights before I hand over to Dr. Shieh.

On a segmental basis, the Internet and data segments continue to drive revenue growth. We will continue our strategy to migrate ADSL subscribers to higher speed services including FTTB, fiber to the buildings. Subscriptions for FTTB have increased substantially over the last several quarters. This paves the way for our future, offering more value added services that require high transmission speed. As the only integrated telecom operator in Taiwan, Chunghwa is best positioned to offer a bundle service. We not only provide bundled services to enterprise customers, but also to residential customers. These bundled services are well received and help strengthen customers' loyalty.

Our proposal to increase capital through transfer of a certain amount of capital surplus and conduct capital reduction afterwards was approved in the AGM held on June 15. With this program, shareholders will be distributed NT$9.09 per ADR in cash. We will continue exploring methods to improve our capital structure.

As a listed company on both the Taiwan and New York stock exchanges, we are strict (inaudible) on following best practice corporate governance procedures. This year, in a survey conducted by CommonWealth Magazine regarding corporate social responsibility, Chunghwa was selected as the number one major corporation in Taiwan in the corporate governance categories. Our practice in corporate governance also won the CG6002 Certificate by the Corporate Governance Associations in Taiwan, and was praised in the Asset magazines 2007 corporate governance awards. Chunghwa won a platinum award, the highest ranking in the category of telecom service in 2007 Readers Digest Asia Trusted Brand. The company has already been awarded the prize in four consecutive years. We are also recognized as the company most committed to strong dividend policies in Asia's Best Company Poll 2007 by Finance Asia.

Now let me hand over -- the call to Dr. Shieh, our CFO, to review our financial results. Dr. Shieh, please.

Thank you. Please refer to slide four. The three year early retirement program from year 2005 to 2007 has been completed and 4,574 employees left the company. Please note the green parts representing salaries and the pension provisions. Before deploying our early retirement program, salaries and pension provisions in 2004 was NT$37.9 billion. However, those are expected to decline significantly to NT$31.6 billion for year 2008. This trend (inaudible) is expected to continue, best demonstrates in the cost savings of early retirement program. In addition to salary and pension, ERP compensation and performance based bonuses were two major personnel cost items starting in year 2005. The compensation for employees that participated in the ERP was a one-time expense during 2005, 2006 and 2007.

Since privatization, we have implemented a new performance based bonus incentive program. This program is targeted to encourage better performance of our employees. A new statement of financial accounting standards regarding the recognition of employee bonuses and the director, supervisor, remuneration and expenses will take effect in year 2008. According to the new statement, companies should treat those bonuses as personnel expenses instead of as a distribution of earnings. However, we will expect total personnel expenses to decline starting in year 2008 despite this accounting change.

Please turn to slide five. A capital reduction plan was approved at AGM this year. In light of the plan we are going to reduce around 9.1% of our total shares outstanding. Our trading suspension will start at end of December this year and end in January before the cash payment day. Since the cash return is derived from our capital surplus and is deemed as shareholders' contributions, there is no tax issue in this regard. Please refer to the right-hand side of the slide for the calculation of reference price following the capital reductions. The Board approved to repurchase 250 million ordinary shares, representing 2.35% of the company's total shares outstanding.

The range of the repurchase price will be from NT$38.36 to NT$85.23 per share. Repurchased shares will be deregistered in the future. We will continue dialogue with the regulator regarding built in cap on the transfer of the capital surplus to capital stocks. And we will further examine a proper timing to conduct share buyback programs and the cancellation of those shares.

Now let us move on to the financial result for the first half of this year. First, I would like to explain the different US and ROC GAAP accounting treatment following our first half 2007 results. Under US GAAP we set aside 10% for anticipated earnings tax on our anticipated after-tax earnings and regularize the employee bonus, remuneration for directors and supervisors and a discount for employee (inaudible) subscription and expenses. ROC GAAP reporting requirements do not withhold these items. Moreover, compensation for the early retirement program is recognized as a personnel cost under US GAAP while it is categorized as other expenses under ROC GAAP.

The different accounting treatment leads to different financial results. They will be presented in the following slides. Again, I would like to emphasize that we use ROC GAAP to calculate our dividends.

If you are following along with the slides I will now move on to slide seven. You can see on the right-hand side of the slide we provide the financial data under ROC GAAP which we believe to be more valuable into our operations. Under US GAAP total revenues for the first half 2007 were NT$97.43 billion, which is a 5.5% increase year-over-year. This was mainly driven by the consolidation of revenues from SENAO and continued growth in the Internet and the data and the mobile business. SENAO is one of our subsidiaries.

EBITDA for first half '07 increased 6.2% year-over-year to NT$50.3 billion. Operating profit increased by 13.1% year-over-year to NT$30.5 billion and the net income increased by 33.5% year-over-year to NT$26.4 dollars. The growth was mainly due to the decreased personnel expenses, earnings from subsidiaries and the decrease in purely tax expense.

Next slide, on slide eight, we show quarterly figures under US GAAP. For second quarter '07 revenue increased by 9.2% year-over-year. EBITDA increased by 2.7%. The operating profit and the net income increased by 6.8% and 46.1% respectively, primarily due to the aforementioned reasons.

On slide nine we take a look at our individual business segment unit. I will review their performance under US GAAP. Internet revenue and the data revenues increased year-over-year by 7.6% and 8.2% respectively. Internet revenue benefited from increased broadband subscriber numbers and the successful initiative to upgrade customer to higher speed ADSL and FTTB services. Mobile revenues increased by 1.5%. This was driven by the 3.7% growth in post-paid subscribers and 18% growth in VAS which is value added service revenue year-over year.

In the fixed line business local revenues decreased by 4.1% year-over-year mainly due to mobile and the broadband subscription. Domestic long distance revenues decreased by 8.2% year-over-year due to mobile subscription and the VoIP. International long distance revenues increased by 4.2% when compared to first half 2006, due to the sale of international pre-paid costs especially to (inaudible) neighbours and the increase in wholesale revenues. Business segment revenues based on US GAAP are also presented on the right-hand side of this page for your reference.

Please move on to slide ten for the quarter results. The second quarter Internet revenues were NT$9.3 billion, a 6.5% increase year-over-year. Data revenue was NT$2.8 billion. Revenues for the mobile business increased by 2.2% to NT$18.7 billion and the fixed line revenues decreased by 2.1% year-over-year.

On slide 11 under US GAAP the total operating costs and expenses for first half 2007 increased by 2.3% year-over-year which was mainly due to the NT$3.6 billion increase in costs and expenses from our subsidiaries. However, the increase was partially mitigated by 10.5% decrease in personnel expenses and 23.9% decrease in handset subsidies year-over-year, owing to the headcount reduction and the year's competitive environment. Depreciation and operating expenses also decreased NT$4.6 billion representing a 3% decline year-over-year. This reflects our capital expenditure reduction, which began in 2002. On the right-hand of slide we've provided data under ROC GAAP for your reference.

On slide 12 for a second quarter, operating costs and expenses increased by 10.3% year-over-year mainly due to the consolidation of operating expenses and [a cost] of NT$3.6 billion from the newly acquired SENAO Corporation.

Now I want to talk about our capital expenditure. The capital expenditure for the first half 2007 decreased by 18.9% over the first half 2006. This was due to the decline in spending in our mobile division by NT$3.1 billion. Going forward, our CapEx may increase due to investment focus on our core business and our effort to migrate mobile and the data customers to higher revenue payphones including FTTx, our prepaid NGN, 3G, 3.5G systems and xDSL.

Now I'd like to hand over to our President Lu for business reviews.

Okay, thank you. Dr. Shieh, our CFO. Now let's move on to our business review. Please refer to page 15. Chunghwa Telecom's total revenue for the first half '07 was NT$96.4 billion, an increase of 5.5% compared to the first half of 2006. The growth in mobile and Internet and data contributed about 1.9%, while the revenue from our subsidiaries contributed about 3.6% out of the 5.5% growth.

On the revenue side of this page the pie chart shows our revenue breakdown in the first half of '07. As you can see the percentage of other revenue increased to 5% due to the inclusion of revenue from our subsidiaries (inaudible). Fixed line revenue was 31%, mobile revenue 38% and Internet and data 26%. For all the integrated service provider in Taiwan we continued to be the dominant player in the fixed mobile and Internet data markets.

Our Internet data are showing on slide 16, through the first half of 2007 we had 4.2 million broadband subscribers with 66.3% of those customers opting for service speeds higher than 2 Mbps. Our broadband access revenue for the first half of '07 reached roughly about NT$10 billion, up about 7% compared to the first half of '06. We expect this growth trend to continue, reflecting our successful efforts to promote our broadband services.

Slide 17 shows our efforts to transition customers to higher access speeds and the progress of our fiber deployment. By the end of June '07, we had more than 1 million broadband subscribers with a service speed of at least 8 Mbps per second, representing 24.9% of our total broadband subscribers. We continue to increase our fiber (inaudible) by deploying our fiber [nodes] in residential buildings, campuses and commercial buildings allowing more alternatives to access (inaudible) variety of Internet value services. In addition, I'd like to emphasize that of the 14,000 plus commercial buildings we serve, and we have about 90% of the market share. At the end of June '07 we had 315,000 fiber (inaudible) subscribers.

Now I would like to move on to our mobile business on slide 18. Chunghwa Telecom has maintained its number one mobile market share position. At the end of June '07 we had 8.6 million mobile subscribers, including 1.68 million 3G customers. Obviously, the number of 3G subscribers as a percentage of the total mobile subscribers base keeps increasing. During the past year we have seen successful mobile revenue service growth led by our exclusive mobile value service platform emome. Among these services, total VAS and the mobile Internet exhibited 18% and 23.4% year-over-year growth respectively.

Therefore data revenues as a percentage of mobile revenues increased to 6.5% in the first half of '07.

Moving on to slide 19, as previously mentioned our 3G deployment has proven to be successful. We had 1.68 million 3G subscribers at the end of the first half of '07, of which 45% utilized 3G handsets; 3G ARPU was 58% higher than 2G ARPU.

We launched SSVP handsets since last year. The CHT9000 series of handsets has mobile office functionality by push e-mail, a calendar, a to-do list and so on. So far we have 44,000 total CHT9000 series customers, and the ARPU for these customers reached NT$1,520 of which 28.7% is from VAS. With the [chief currency] with other renowned members we will continue to roll out more new customized models to provide customers with additional choices.

Finally on fixed line on slide 20, on the right-hand side of this slide, please note how fixed line (inaudible) services like our ringback tone increased significantly over the last several months so the end of this July, we had 465,300 fixed line ringback tone customers compared to 56,000 at the end of last year.

On the right hand side of this page you can see the payoff of our continuous effort to maintain our fixed line market share. And I can highlight the -- for either of these our market share was 61% at the end of June '07. I'm confident we did a good job defending our fixed line market share and are confident that our strong market position will continue in the future.

As an integrated telecom service provider Chunghwa is in a very good position to offer bundled solutions and the (inaudible) on page 21.

For enterprise customers we provide top line of solutions such as VPN and ICT as well as integrated [digital] services. Furthermore, we also bundle our broadband and mobile service in order to form a seamless telecommunications network.

For individuals and families we offer broadband plus MOD service, consolidated invoices, stored value cards for all services, friends and family service, and mobile Energy Plan with attractive rates. What I can report to you is that subscribers of friends and family grew 10.9% year-over-year.

Operating results of Energy Plan were also outstanding, with ARPU reaching NT$1,406 and subscribers growing 9.2% quarter-over-quarter. By the end of June '07 there were 333,000 MOD subscribers compared to 157,000 a year ago.

We've also been working hard on content side. Originally baseball has had about 750,000 hits on our platform then the MOD, 3G and hiChannel through the online launch at the end of April this year. It also has -- sport brought in new ad revenue for the company.

That's all for our previous review. Before I hand it over to Chairman Ho for the strategic highlight, I will give some regulatory updates for your information so please refer to page 22.

I'd like to update you with the current status of the new tariff setting regulations on MOD open platform, local look unbundling call location, F2M call pricing right and WiMAX messaging.

Regarding the new tariffs settings the NCC resolved to the deals to compares in December last year. For fixed line we cannot charge the indoor wiring maintenance fee by default. For the mobile business tariffs for 2G services, including fixed to mobile call, prepay services and the service package with the highest rate are each regulated to a peak (inaudible) by a range of 4.88% to 5.2%.

For ADSL access service we were mandated to the deals carried by 5.4% and not allowed to bundle ADSL with local service.

Our MOD open platform was certified by NCC on -- January 30 this year. Compliant with NCC's litigation, MOD is now deemed to be a telecom service. We expect to have more channel aggregators to join in and provide diversified contents.

Local loop was classified as a bottleneck facility in December 2006, and the cost base rental fees are yet to be determined by the regulator. We are obligated to co-locate with alternative operators if there is enough capacity. Currently 13 toll switches are co-located with alternative fixed line operators and another 13 with mobile operators.

Pricing rights for fixed to mobile calls are expected to revert back to the fixed line operator by April 1, 2010 according to NCC's announcement.

Our bid for the WiMAX license issued on July 26 was unsuccessful. However, we are considering taking part in the (inaudible) messaging in another two years.

Now I would like to hand it over to Chairman Ho Chen for our strategic outlook.

Thank you, President Lu. In conclusion, I believe our strategy is quite clear. Let us highlight the key aspects of our near term strategy on slides 24 and 25. First, in our core businesses, we will speed up the adoption of our 3G and the VAS and will expand HSDAB coverage to attract more mobile Internet users.

We intend to continue to grow our broadband subscribers' base by migrating high end customers to fiber. We'll also develop a new application service to create new revenue stream. In the near future, we will start to offer 50 Mega and a 100 Mega FTTB services by launching fixed video phone and e-watching services.

Furthermore, we will strengthen our data minding capability to offer tailored service to select customer segments. The customer service structure was reorganized in the first half 2007 to enhance service quality.

We will also offer rewarding plan across our major businesses to increase customer's loyalty and will reinforce the e-invoice service to save costs.

Second, we are promoting convergence through compounded service offerings, including integrated enterprise solutions and mobile plus fixed, mobile plus broadband, and digital home bundled services.

Third, we have streamlined some of our other operations. The company consolidated our Central and Southern Taiwan business groups to enhance operating efficiency in the first quarter. In addition we still have the enterprise business group to boost our capability of ICT customer total solutions.

Reason three, our Board resolved to establish property, develop the management subsidiary to operate real estate business with specialty and efficiency. The company is expected to operate by the end of this year.

Fourth, on M&A we acquired 35 -- 31.5% ownership of SENAO in January 2007 to enhance business channels and distribution capabilities, especially for handsets. Their exclusive service stores are expected to complement Chunghwa's service hours and enhance sales to our younger target demographics.

Additionally, we acquired Elta to enrich video content and value added service. Major league baseball games are one of the key additions from Elta.

Next page, fifth, business alliance; we are now developing MSN and digital home services with Microsoft. We have cooperated with Google for applications such as map, mail, browsing and search engine on ISP and mobile phones.

We are also forming a co-marketing alliance with [cafe], financials to attract more customers.

Sixth, we will continue to focus on driving cost savings. Besides personnel savings, we will examine our equipment investment and utilizations carefully in order to control related depreciation expenses.

We will also control marketing costs, especially handset subsidies.

On the cash investment and management side, we are now strengthening our existing risk management framework, and building our in-house expertise. We adopt a managing the managers approach to develop an in-house capability of cash investment and asset allocation. We are trying to optimize yield by extending the duration of our investments that are not required to meet our short-term cash needs, to add higher yield instruments to our investment portfolio, and steadily move a great amount of our investment offshore in order to improve yields, spread risk, and broaden our asset diversification.

Finally, we remain our full -- fully committed to maximizing value for our shareholders. We intend to continue to maintain our high dividend payout policy. We will continue exploring opportunities to enhance shareholders' returns through capital management. Although contribution from property revitalization is still small, we expect it to grow and we will make best use of those assets to ensure -- to enhance returns to our shareholders.

That concludes my presentation. We are happy to take your questions. Operator, please.

Now we are going to the question and the answer session.

(OPERATOR INSTRUCTIONS).

Hi. You are on the line. Go ahead, please.

Hi. Can you hear me?

Yes, please.

Thank you. Good evening. My name is Anand Ramachandran. I'm calling from Citigroup. Thank you so much for the call and congratulations on the good numbers. Three questions to start off with. Firstly, if I look at slide number four, which is the employee expenses, could I just confirm you expect, if I take out the ERP costs, something like NT$35.8 billion in total employee expenses this year, and obviously a much lower number next year, and this is the total employee expenses including also the new employees you plan to hire?

And a follow-on from that would be if I look at your first half results and then the personnel expense guidance, do you -- are you still maintaining your full year profit estimate of NT$45 million? So that's question number one.

Question two would be on the dividend payout. Given the share buyback announcement we should expect that the payout proportion will probably fall just like last year, would that be a reasonable assumption?

And the third question I wanted to check with you was on the depreciation. Should we expect it to be probably rise into the second half given you expect CapEx to rise, or should we expect the current rate to stay the way it is? Thank you.

Okay. Yes. Thank you. We anticipate the total human resource cost including the our salary and pension and bonus etc. probably will gradually slightly reduce, declining for the next few years.

And about the dividend payout ratio, as you know, we just launched a buyback program recently and we try to maintain the -- a good dividend and also maintain a stable dividend ratio for our shareholders, but actually we need to see how (inaudible) come out by the end of this repurchase program. So, but I can say again here that we try to maintain a dividend payout ratio as stable as possible.

About the third one is the depreciation --

(technical difficulty)

You mention about the impact of share buyback on the dividend payout for the next year -- for this year. Our estimate (inaudible) for the coming (inaudible) of all the events to this share buyback are, as we mentioned, the repurchased shares will be deregistered in six months, and we estimate that the timing for this deregistration will occur next year. That's all but the impact on our dividend payout will be the results, operating results, of next year, okay, so that will be distributed in year after.

Okay.

And since the -- as we announced in our results of the repurchase program, is similar to what we had conducted last year. With our reasonable estimate of the percentage of shares repurchased, the impact on dividend payout will be roughly the same of what we had last year.

On the depreciation, well, although the CapEx for this year we forecast to be about NT$30 billion, slightly higher than what we spent last year, because of the all this depreciation policy, the impact of this very recent growth in -- or increase in CapEx will not significantly affect depreciation for this year. So we believe, as I mentioned earlier and in several times during the past, depreciation will fall about at least NT$1 billion per year for the coming years. So we are confident to say that the depreciation for this year will be about NT$1 billion less than what we had last year.

And the second part of your first question is on the guidance we offered in April.

That's right. After the first half do you think that's too conservative?

Well, the results of the first half are better than we anticipated, so with this kind of development we are slightly more optimistic toward the second half of this year. So we believe from today's standpoint of view, the results for the second half could be better than what we reported in the guidance or, yes, we can be a little bit optimistic we'll be better than guidance offered in April.

I would not say ourself as conservative. I would say, thank you for the moderate regulators. Thank you.

Thank you so much.

Your next question, you are on the line. Go ahead, please.

Hello.

Yes. Please go ahead.

Hi. This is [Jimmy Cheung] with JP Morgan. Just have four quick questions. First is on your international long distance, it's revenue line performed very well in the second quarter. If I divide the total ILD revenue by the outbound minutes to get a revenue per minute it has been declining quarter-on-quarter for the last few quarters, but spiked up recently in the second quarter of '07. Is there any reason for this? I know you said you're selling more international pre-paid cards and wholesale revenues, but I was just wondering if there was any other reason for this performance.

The second question relates to the costs, particularly handset subsidies and personnel. You said that handset subsidies fell 24% and personnel fell 10%, can you give us the actual handset subsidy costs and the actual personnel expense costs for the first half of '07?

And a third question is on the pricing rights of fixed-mobile calls which you say may revert back to fixed line operators by 2010. Does the NCC still require your fixed line market share to fall materially, say, to about 80% for this to happen? And if it does occur, how much positive contribution would you need to have on your revenue line?

And the final question is what is the average ARPU for MOD service in the first half of '07? Thank you very much.

On -- let me answer your question from (inaudible). The average revenue for MOD is still at the learning curve stage. I would -- let me put it this way because we are at the stage of transitioning from used to be regulated according to the cable TV law, but now we are converting our platform to be an open platform, and to be regulated by telecom laws.

The ARPU for the first half of this year, MOD, is about NT$87, okay? The price, the pricing rights for fixed-mobile calls as we reported, the NCC has announced that it's going to take into effect April 1, 2010. We believe the requirement for this is no longer, it used to be -- they used to say that the fixed line market share should fall below a certain percent before they would consider such a new policy. We, from our understanding, there is no such prerequisite for this new policy.

And the handset subsidy you know for the first half of this year, the [actual], the total number is about NT$2.3 billion, NT$2.4 billion and this has been reduced about 24% from the same period last year.

And I missed the -- ?

ILD.

[The possibility] is on ILD. The reason that we performed quite well on ILD is because of the effort we put on the wholesale marketing and the volume on the wholesale increased significantly during this period.

And just a final follow-up --

And also, the prepaid call, on ILD service, the prepaid call increased about 30%, wholesale increased about 20%.

And just a final figure on the personnel expense charge for the first half of this year?

The personnel expense for the first half of this year was NT$18.7 billion.

Okay. Thank you very much.

The following question is from Lehman Brothers. You are on the line. Go ahead, please.

Hi, this is Danny Chu from Lehman Brothers. I've got three questions. The first is, can you talk a little bit about the implication of this establishment of the property development and management subsidiary? Is it down the road that we should expect that this unit will be separately listed in order to crystallize the value?

And then the second question is, on the share buyback, is there implication that we should draw upon this share buyback, will it have any impact or implication for the possibility of another capital reduction next year?

And then finally, can the management talk about with (inaudible) to the [news call] that Chunghwa may invest into (inaudible) cap. Can the management comment on that as well? Thank you.

Yes, I think our Board has approved the formation of our new property and development corporation, and our agenda is, by the end of this year, hopefully, but no later than the first quarter of next year we are going to form such a new subsidiary by then and we are going to hire a professional team to join this year, and we'll more focus on business model, and the way we operating this subsidiary will be more, [let's say we'll create it through our expertise on additional] (inaudible) and we also more emphasize on the environmental [petition] but the solid or detail (inaudible) will be -- we are waiting for the new (inaudible) new management team to join us.

About the share buyback, as we mentioned, the share buyback, the impact to our cash dividend, if there is an impact the impact will be effective in the year 2008.

And pursuing capital management is our continued goals, and so we, this year we have found two approaches (inaudible) [the capital surpassed the capital stock], and now we find the capital market position is appropriate so we don't (inaudible).

And the second project is, since we are cautiously and seriously looking for [opposite] investment, and above (inaudible) I think we are looking for, actually we have one potential partner to fund this joint venture [related] to the ITC project Internet data center which is also our core business, and hopefully we can have a more solid plan, or maybe we have -- can develop a new entity by the end of this year.

So, just to follow-up on that, for the property development and management subsidiary, should I expect some (inaudible) within the next 12 to 24 months it will still be a private unit under Chunghwa, or going forward there is a plan within the company to separately list that unit?

You are talking about our new subsidiary property enterprise, right?

There was a newly formed property development and management subsidiary.

Yes. I think that we do have the medium plan for the listing of this new subsidiary, but at the initial stage we are going to 100% hold on to these entities, and we expect for first year probably we are not going to accrue the profit from the subsidiary, but hopefully for the following second or third years, then we can realize some return from these investments. But for the long-term goal, our internal rate of return for this investment, we anticipate about 7.5% internal rate of return for the next five years.

Thank you.

The following question is from England. You are on the line, go ahead, please. Hi?

Hi. This is (inaudible) calling from Morgan Stanley. The only question I have is, you have (inaudible) a significant growth in other revenue. Can you just say what, for us, what is driving that growth and give us an outlook for the second half?

Well the other revenue, the majority of the growth in other revenue comes from the subsidiaries now, because of the business on handset sales and it's accounted above, more than above [NT$3.17 billion].

So, going forward would that be roughly the same magnitude that you guys can generate your second half or going into 2008?

Well, it (inaudible) is to be the same number for the second half or it could be a better number. [You should trust] more in our revenue and profits from now, going forward.

Sure. What's the, roughly, the profit (inaudible) now?

Well, for now (inaudible) in the channel dispute (inaudible) the profitability of this company I believe is not as good as Chunghwa Telecom, but it's merely (inaudible) that we should explore and will enhance our operation. We'll give you the (inaudible) financial results, maybe later.

Okay. Thanks.

The following question is from Goldman Sachs. You are on the line. Go ahead, please.

Hi, I am Kathy Chen from Goldman Sachs. Thanks for the call. I have four questions. Firstly, regarding your ADSL access revenue (inaudible) it looks as if you're declining by about 5% to 6% year-on-year starting in May of this year. Can you elaborate what the reason for this is? Is it purely from the price cap that was implemented?

And my second question is on CapEx, how come the mobile CapEx dropped so much in the first half? And if you are maintaining your total CapEx guidance for this year at NT$30 billion, then is there a [data] number for the mobile CapEx? Has that been allocated somewhere else?

The third question is, marketing (inaudible) look to be relatively low in the second quarter, can you provide outlook for the second half? Can you expect some -- give me higher spending in the third quarter?

And then the last question is on the capital management side. In the prepared statement you commented that you're still negotiating with the regulator to increase the limit on transferring the capital surplus, the capital stock. Can you give us more details on exactly where this progress is? And is there any chance that we can see conclusion within this year or within the next twelve months? Especially given the political calendar in further January March time frame. Thanks.

Your first question is on the [data] revenue? Is that right, the decline?

Yes, it is access revenue, it looks to be declining about 5% to 6% year-on-year starting in May of this year.

(inaudible)

Yes, the reason is very simple, because we are migrating in our (inaudible) it is our customers to fiber solutions, not for (inaudible). And the revenue from [Piper] Solutions and FTTx increased greatly in our -- as compared with the decline in xDSL.

And the CapEx for mobile, we budgeted this year to about NT$6.3 billion and we have spent about NT$1 billion so far. And the remaining amount will be spent in the second half of this year. And sometimes it's because of the payments stage associated with the acceptance test of all these installations. The CapEx for this year, as we mentioned before, is about NT$30 billion and we have no division on this in our spending.

The marketing expense in our -- going forward for the second half, probably the same as we have spent on the first half. And, because we control our (inaudible) very carefully and, as we just mentioned in our -- 24% decrease as compared with the same period last year. So we expect the marketing expense to be declining for the whole year.

The last question about capital management, and we are continuing to negotiate with the regulator about a 10% cap. As you know, at Chunghwa Telecom, our capital [surplus power] is a very unique case among the Chinese companies. Not many, only I can say only a few, but a few companies have this problem. We have a huge capital surplus in relation to our remaining account of equity accounts. And we -- a total [SFC] and we petition -- they can lift up the 10% cap under certain circumstances. For instance, they can see that we are a company which was -- state-owned companies and then become private companies. And also, you can see there, you were there, the company have a (inaudible) of major merger and acquisition activity. And, on these two cases, whilst talking about -- you would hear the case about the merger and acquisition, or hear the case about a major organic change. And people are (inaudible) change. We can -- we petition for (inaudible) and can lift up the 10% cap.

But, so far, we haven't got the final answer yet but we really understand the [FCC's] seriously clear about this question and then they also have already sent out a survey to all of -- some major list companies, and they also get a feedback. So I think we feel we got a part of attitude from [FCC]. But we haven't got an answer yet. We will closely watch this possibility.

Thank you.

The following question is from CLSA. Now, you are on the line. Go ahead, please.

Hi. Thank you. This is Elinor Leung from CLSA. I have three questions and the first one is that, after the current share buyback, how much room can you buyback these shares, given that 49% for your shareholder limit is on your company?

And the second question is that, you expect that the property contribution in 2009, which is the second year of the establishment of your property subsidiary, what do you expect the contribution in terms of revenues in 2009 or 2010?

And the third question is that, you have completed your early retirement program, are you continuing to reduce any staff to lower your personnel expense in the future?

Yes, I think that since our [TUPE] financial holding already reduced to close to 41%, nearly a little bit over 41%. Actually we are (inaudible) to buyback more shares. Essentially we have -- we are (inaudible) which companies. So buyback shares and (inaudible) share and I think it is for the benefit of our shareholders. We'll see how (inaudible) but we have to considered the capital market conditions. So, at this stage, we are seeing 2.35% of our share outstanding buyback is a profit. But I'm not sure whether we can fully buyback this amount now, because we're doing it as a considered (inaudible) of conditions. But definitely, in the near future, if the market permitted, we may consider this.

The question for our new property entities, as I mentioned earlier, we anticipate that we may have the return from this entities. And actually I cannot give you an exact number as at this moment, but I would anticipate the returns there (inaudible) is minimal compared to our (inaudible). So I would say in the range -- the minimal -- I cannot give you a number right now. But we anticipate it will partly be (inaudible) from year 2009.

Your third question is about our ERP. I think that we have already completed our three-year headcount reduction program. And actually, you know, naturally every year we have people apply for retirement but, so far, we don't have any plan on hand about further early retirement programs, because we fear that current headcount about, you know 24,000, 25,000 employees is appropriate number for us at this moment.

Thank you.

Thank you. Thanks.

And then we have the question on the personnel, this issue. I should have mentioned before that we had this 3,000 reduction -- in headcount reduction in three years. And from the presentation we have seen earlier, that in our -- 4,500 took part in the ERP program and we -- higher during this period, about 1,500. So really, you know, we are achieving this net reduction of 3,000 in three years. And the current number of employees today (inaudible) is about 24,000. This figure is below -- the figure I always mention is 25,000. So it's already below the target we have set before, at 25,000. So our Chairman has asked the management to reveal our personnel requirements and we are at the stage of doing this homework. And if we have some more concrete programs to be -- to consider, we will let you know.

Thank you. Regarding the property. When do you think you will see initial revenue contribution from the property?

This year or --

(inaudible) 2009, are you talking about 2009 or 2010? We will have pending -- our (inaudible) pending, you know, for this company in the coming months. And so when we establish this, the business plan in great detail, and when we announce this -- the establishment of such an enterprise -- probably have a better idea to prepare you.

I would say when you say meaningful by year 2009, I would define meaningful as a positive income to the company, certainly, but maybe not as sizeable in terms of our total revenue. Thank you.

Okay. Thank you.

(OPERATOR INSTRUCTIONS).

Now you are on the line. Go ahead, please.

Hello.

Hello, please go ahead.

Hello, am I on the line?

Hi. Please go ahead, sir.

Oh yes, hi, can you hear me? You can? This is [John Kim] from Merrill Lynch. Would you please give us some update on your progress regarding to your talk with the channel provider of your IPTV service, say how any channels that you're able -- have you been able to secure and what kind of (inaudible) can we be expecting?

And my number two question is that, is it correct that we assume that you will be -- you will not be aggressively marketing your IPTV services but treating it mainly as a means to enhance your customer loyalty? Thank you.

This is a very good question for our MOD or IPTV operation now. The first question related to a very sensitive area, especially in Taiwan. So, we mentioned about the -- we have already made contact with (inaudible) or proven providers, and we believe we have made some progress but I'm sorry, this is not the right time for us to disclose any specific information about such contacts or results. When it's materialized and with big letters approval, we certainly would let everybody know that to what extent we are able to enhance our content and programs.

And whether we would market MOD service, definitely this is an area for our future, to (inaudible) in a very essential part of all these broadband applications. So we will of course, we would make this -- best use of this to retain our customers but also to gain customers, making use of our service. Yes.

Thank you.

Now we take the last question. You are on the line. Go ahead, please.

Hello. Hello.

Hello.

Yes please go ahead.

It's Jimmy Cheung, J P Morgan, just two quick follow-ups. One is do you have any guidance for this full year tax rate under US GAAP, or the tax rate or the tax expense?

And the second is what's your strategy for WiMAX given that you didn't win one of their licenses awarded last month? Thank you.

Let me take these two questions. The first one is on the effective tax rate. Let me advise you that (inaudible) the tax rate for our -- under ROC GAAP which is about 20.2%, 20.3% for the first half of this year. And going forward, you know, for the whole year, you may assume 20.5% to 21% effective tax rate for this year. And our strategy, or what we think about WiMAX, well, WiMAX is a technology -- new technology and it's still developing, and from our understanding the system or handsets, terminals associated with this new technology probably will be ready some time next year, or even later now.

The service it's [awful], so these new technology are available from Chunghwa Telecom today. So we keep emphasizing or make this clear to our customers that if you need any service, Chunghwa Telecom we can offer to you now at reasonable price.

And already mentioned that in two years if the government is going to issue new licenses covering the entire region, we are considering to participate, okay, and furthermore for those who have received, awarded the license for WiMAX, some of them have already come to us and see if we can be of help to them or collaborate with them. And the company, we have participated in some of the so-called in Taiwan, WiMAX projects, and we are committed to finish and to comply with all the requirements from under this projects. So we are ready to make dynamic -- we are [flexible], in pursuing our business as well as pursuing some new opportunities with others. Yes.

Great, thank you very much.

Okay, thank you.

Now, I will turn that over to Chairman Ho Chen. Please.

Thank you, good night, everybody.

Thank you, Chairman Ho Chen. That's all for today.

Conference call replay details will be available on CHT website at (inaudible). 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. Goodnight.