Chunghwa Telecom Co Ltd (CHT) 2007 Q3 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's third quarter 2007 operational results. During the presentation all lines will be on listen only mode. When the briefing is finished, directions for submitting your question will be given in the question and answer session. Now I would like to turn it over to President Lu, the host of conference. Thank you. President Lu, please go ahead.

Thank you operator. Good evening everyone. This is Shyue-Ching Lu, President of Chunghwa Telecom. I would like to thank you all for joining our third quarter 2007 earnings results conference call. On today's call our CFO Dr. Shieh and our Senior Vice President, Mr. Chang, will take you through the view of our financial results and 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 our slide number one.

Now let me hand the call over to Dr. Shieh to review our financials.

Thank you President Lu. Now let us move on to the financial results based on U.S. GAAP for the third quarter 2007. Again I would like to emphasize that we use ROC GAAP to calculate our difference.

If you are following online with the slides I will now move on to slide three. Our total revenues for first nine months 2007 were TWD148.5b which is a 7% increase year over year. This was mainly driven by continual growth in the Internet and the Data and the Mobile business and the consolidation of revenues from Senao.

EBITDA for the first nine months increased 5.3% year over year to TWD77.1b. Operating profit increased by 12.9% year over year to TWD47.9b. And net income increased by 23.9% year over year to TWD38.3b. The growth was mainly due to the increase in Senao expenses, earnings from subsidiaries and a decrease on disputed tax gains.

On the right hand side of slide three we show current figures. For the third quarter '07 revenues increased by 10% year over year, EBITDA increased by 3.1%, the operating profit and the net income increased by 12.4% and 6.8% respectively, primarily due to the aforementioned reasons.

On slide four we take a look at our individual business units. Internet revenue and the Data revenues continued to increase. Internet revenue benefited from increased broadband subscriber numbers and a successful initiative to upgrade customers to higher speed ADSL and FTTB services.

Mobile revenues from January to September increased as well. This was driven by the 2.9% growth in postpaid subscriber and a 23% growth in Value Added Service revenue year over year.

In the Fixed Line business local and the domestic long distance revenues decreased by 3.9% and 7.2% respectively year over year, mainly due to mobile substitution and the VIP. International long distance revenues increased by 4.4% compared with the same period last year, mainly due to the increase of the sales of international prepaid cards to foreign workers and an increase in wholesale revenues.

For the quarter result, third quarter Internet revenues were TWD9.5b, a 5.5% increase year over year. Data revenues were TWD2.9b, revenues for the Mobile business increased by 1.4% with TWD18.9b and the Fixed Line revenues decreased by 1.9% to TWD15.5b year over year.

On slide five the total operating costs and expenses for the first nine months 2007 increased by 4.5% year over year which was mainly due to the TWD7b increase in costs and expenses from our subsidiaries. However, the increase was partially mitigated by the 9.5% decrease in personnel expenses and a 30% decrease in handset subsidies year over year owing to the headcount reduction earlier this year and our intention to maintain profitability.

Depreciation and the operation expenses also decreased TWD1b, representing a 3.0% decline year over year. This reflects our capital expenditure reduction which began in year 2002.

On the right hand slide of the slide five we provide you the data for the third quarter. Operating costs and expenses increased by 8.8% year over year mainly due to the consolidation of operating costs and expenses of TWD2.8b from the newly acquired Senao.

Moving on to slide six. CapEx for the first nine months of 2007 was approximately TWD15.8b, a decrease of 14.6% year over year. This was mainly due to the decline in spending in our Mobile division by TWD3.4b. CapEx for '07 is expected to be TWD27b. Going forward, our CapEx may increase due to investment, focused on our core business and our effort to migrate mobile and the data customers to higher revenue platforms including 3G and the 3.5G system, IP based NGN, FTTx and xDSL.

Before I hand over to Mr. Chang, I would like to elaborate a little bit on the developments of our capital management program. As shown on slide seven, our capital reduction plan was approved at the AGM this year. According to this plan we are going to reduce around 9.1% of our total shares outstanding. A trading suspension is scheduled to start on December 21 this year and end on January 8 2008, right before the cash payment date. If that cash returned is derived from our capital surplus, is deemed as shareholders' contribution. There is no tax issue in this regard. Please refer to line seven of the slide for the calculation of the reference price following the capital reduction.

In addition to the upcoming capital reduction, the Company completed a repurchase program last week. The Board approved the repurchase of 450m ordinary shares representing 2.35% of the Company's total outstanding shares. From end of August to October 28 we have repurchased about 121m shares, equivalent to about 1.14% of the total outstanding shares. We plan to cancel these shares -- I'm sorry, we plan to cancel these repurchased shares in the first quarter of 2008. We have been continuing our dialog with the regulator on lifting the cap on the transfer of the capital surplus to capital stock. Recently, the rule regarding the cap has been reviewed and is ready to be revised in the near future.

Now let me hand over to Mr. Chang.

Thank you Dr. Shieh. Chunghwa Telecom's total revenue for the first nine months 2007 was TWD148.5b, an increase of 7% year over year. On the left slide of slide eight the pie chart shows our revenue breakdown for the first nine months of 2007. As you can see, total Fixed Line revenue at the first stage of total was 31%, Mobile revenue was 37%, the Internet Data was 25%. As the leading integrated telecom service provider in Taiwan we continue to be the dominant player in the fixed, mobile and internet data markets.

As shown on slide nine, during the first nine months of 2007 we had 4.2m broadband subscribers with 57% of those customers opting for service with higher than 2Mbps. Our broadband access revenue for the first nine months reached roughly TWD15b, up about 6.2% compared to the same period of last year. We expect that growth trend to continue, reflecting our successful efforts to promote our broadband services.

Slide 10 shows our initiative to migrate the customers to higher access speeds and the progress of our fiber deployment. At the end of September 2007 we had more than 1.1m broadband subscribers with a service speed of at last 8Mbps, representing 26.4% of our total broadband subscribers. We continue to increase our fiber penetration rate by deploying our fiber network in residential buildings, campuses and the commercial buildings, allowing more opportunities to access and adopt a variety of internet value added services. Additionally, and we have to emphasize that of the 15,000 plus commercial buildings, we serve -- we have 90% market share.

As you can see on the left side of this slide, the average bandwidth per user continues to increase over the last few years while the number of fiber subscribers also shows strong growth. Going forward, we expect that this trend continues.

Now I would like to move on to our Mobile business on slide 11. Chunghwa Telecom has maintained its number one mobile market share position. At the end of September 2007 we had 8.7m mobile subscribers, including 2m 3G customers. You can observe that the number of 3G subscribers as a percentage of the total mobile subscriber base keeps increasing. During last year we have seen successful mobile value added service grow aided by our exclusive mobile VAS platform "emome". Among these services, total VAS in the mobile internet represented 23%, 34% year over year growth respectively. Therefore, Data revenue as a percentage of Mobile revenue increased to 6.8% for the first nine months of 2007.

Moving to slide 12. We had 2m 3G subscribers at the end of September 2007, of which 49% utilize 3G handsets. 3G ARPU was 51% higher than 2G ARPU, primarily as a result of our innovative 3G strategy of customized handsets and the promotions of mobile office services. For instance, we launched the HSDPA handset last year. The CHT9000 series of handsets has the mobile office functionality like push-mail, calendar, to-do lists, plus other features. So far we have 51,000 total CHT9000 series users and the ARPU for its users reached 1,367, of which 30.5% is from VAS. With strategic partnership with other renowned vendors we will continue to roll out more new customer models to provide the customers with additional choices.

On the left side of slide 13 please note how our international calling card traffic increased significantly over the last several quarters. For the first nine months the number of minutes increased by 71% over the same period of the last year. I would like to highlight that for ILD our market share was 52% at the end of September 2007. As a comment, we did a very good job defending our fixed line market share and are confident that our strong market position will continue in the future.

Now moving to slide 14. In order to meet customer demand for convergence services the Company continues to construct a user friendly platform and enriched content.

Finally, the NCC certification of the MOD open platform in January 2007 will have continuous MOD and telecom service. By the end of September 2007 there were 358,000 MOD subscribers compared to 205,000 one year ago. We have also been working hard on the content side. There have been more movie titles from major Hollywood studios. In addition to Major League baseball there will be many sports, such as basketball and soccer on our platforms, namely MOD, 3G and hiChannel. That's all for our operations review.

Next I would like to update you with the current status of the regulatory regime on slide 15. Our MOD platform was certified by NCC earlier this year. Complying with NCC's regulation MOD is now deemed to be a telecom service, as I explained earlier. We appear to have more channel aggregators to join in and provide a diversified content.

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

Pricing rights of fixed to mobile costs are expected to revert back to the fixed line operator by April 1 of 2010 according to NCC's announcement. As the technology shifts towards the digital conversion, the regulatory environment is shifting in accordance. Currently, our regulator is reviewing the existing Telecoms Act and the three media -- related media, trying to draft a new law to integrate them into one single law to meet the new challenge in technology. However, the proceeding procedure is expected to be lengthy since the legislative approval is required.

Now I would like to hand the call over to President Lu for our strategic outlook.

Thank you Mr. Chang. Let us highlight the key aspects of our near term strategy on slide number 17. First, in our core businesses we intend to continue to grow our broadband subscriber base while migrating high end customers to fiber. We will expand HSDPA coverage to attract more mobile Internet users. We will also strengthen the partnership with big name enterprise on convergence service to increase our customer base and also to meet customers' demands by enriched and diversified content.

Second, for mergers and acquisitions we would like to explore the opportunities in the vertical and horizontal integration of telecom industry in order to provide quality customers total solutions.

Recently, we acquired 30% of KKBOX, a local leading online music content provider to enhance our VAS and further facilitate our cross platform marketing.

Finally, we remain fully committed to maximizing value for our shareholders. While maintaining our high dividend payout policy we will continue exploring opportunities to enhance shareholders' returns through capital and cash management.

We will revitalize unused land. We will establish a property development management subsidiary to operate real estate businesses with specialty and efficiency. The Company is expected to begin operating by the end of this year and we will start the second phase afterwards. We expect this contribution from property revitalization to be a bonus to our return on equity.

This concludes our presentation. We are now happy to take your questions. Thank you.

Now we are going to the question and answer session. (OPERATOR INSTRUCTIONS). The first question, you are on the line. Go ahead please.

Hi, can you hear me?

Yes.

Yes, hi, good evening. My name is Anand Ramachandran. I'm calling from Citigroup. Thank you for the call and congratulations on the good numbers. I have three questions. Firstly share buyback. You had initially targeted 2.5% of 32.35% but you stopped short of that target. Any reasons why?

Secondly, on slide seven, a very interesting comment you made that you think you are nearer to getting an approval for a rise in the capital surplus limit. Is there any specific issue that gives you that much more confidence than you see in the near future? Is it possible to further get into specifics on whether it's three months, six months a year, or any timeline that gives you this increased confidence to put this in the slide?

And thirdly, I guess a quick question. Have you finalized a record date for the capital reduction? Thank you.

Okay. Regarding the share repurchase, we purchased about 1.14% of the shares outstanding. The reason we didn't reach the target is because the capital markets conditions. We found if we further purchased more shares on the market, it may not be in the best interests for the shareholders and so that's why we only conduct about 48% of our original target.

And about capital management issue and you mentioned about the 10% capital surplus transfer, right? And we have been in dialog with the regulator and meeting the [main bit] on the capital surplus, the capital stock. And we found the regulator SSC has been totally consider our request and is under the review of the possibility of lifting the cap under certain circumstances. And it is scheduled to be revised in the near future. If the operating law revised, we will consider to propose to have the bigger size of the capital management to the Board for next year.

Is there a timeline when you expect something to come from the SFC? Is it three months, six months or you don't know?

Yes, there is no timeline. If we have the chance to do the bigger sized capital management probably we will do one time a year. So the timeline we do next year, the timeline will be the same as this year.

Your question also related to the possibility to finish the revision on the regulation and since this is governed by the regulators SFC. So we have seen a tract of the revised Article on that regard but we finish the review on the process. And so the sooner the better but it's not within our control. So we would like to follow the procedures that have been taken by SFC.

Okay, thank you. And the record date for the capital reduction?

For capital reduction, you mean for this -- the current capital reduction that will be conducted?

Yes.

Anand, your second thing, did you mention about the last trading day? The last trading day will be December 20. Okay?

Okay. And when will the stock start to trade ex the capital reduction? Will it be December 20 as well?

That will -- because you know we have trading suspension.

It will be [January]?

Yes there will be starting from December 21 to January 8. So the new shares will be listed on January 9.

Okay. Thank you.

Next question. Please go ahead. You are on the line. Please go ahead.

Hello.

Yes, please.

This is Danny Chu from Lehman Brothers. Thanks for the conference call. I just had three quick questions. The first one is can you comment on the recent news flow that Chunghwa Telecom may cooperate with PCCW on using PCCW's Now TV platform in Taiwan?

Second question is in terms of your future CapEx, can you provide a rough breakdown in terms of the CapEx spending? What is the percentage that will be spent on the Mobile business, what is the percentage that will be spent on the NGN and also the Broadband business?

And finally, on the Property Redevelopment and Management business, roughly, in terms of timeline, when should we expect this business will be contributing earnings or revenue to the Company? Thank you.

Well the Company intends to collaborate with PCCW on their Now TV. But specific timing for launch of programs offered by PCCW is yet to be determined. There are certain legal procedures need to be done.

The second question relates to the future CapEx spending. The general guideline for CapEx is about 15% of our revenue. And the -- most of the spending will be on NGN, fiber to the access solutions for broadband. And certainly we would appropriate enough amount to be spent on mobile because mobile is very important. In terms of percentage, roughly maybe something like 30%, 30% to 35% will be on Mobile and the rest on Broadband, including access and ISPs, all the appropriate infrastructure. And as we migrate our PSDN to NGN, certain CapEx is required. But we will monitor together with our deployment of all this CapEx, the services we deploy to our customers. And the revenue stream is also very important. So we -- while we are spending on CapEx we also observe new services offering. Okay?

The property -- regarding our newly established property subsidiary, the new subsidiary property will be operating in the beginning of next year. And we expect late next year, although just beginning, but the new subsidiary will contribute earnings to Chunghwa Telecom, although it's not sizeable.

Thank you.

Next question. You are on the line, go ahead please.

Hi, this is Tim Culpan from Bloomberg. You revised down a little bit your CapEx this year. You'd originally said TWD30b now you're looking at TWD27b. Can you give us an idea of next year what you're looking at for CapEx? I think it's really clear what you're going to be spending it on but if you give us some numbers.

Also let's say the last time we met, Joseph, you said that 10% growth in profit this year was achievable. You seem to be on track with that given the latest update. Do you still feel that's the case or maybe it could be even higher than that? What do you think might be achievable now? Thanks.

The CapEx spending for this year, we were mention about TWD30b earlier because we believed that what's required for the year. But since our procedures to purchase equipment encompass some debate, and I mentioned during the half year results call that about 90% is the target that is expected to be achieved. That's why we adjust this year's forecast for the CapEx at this time is about TWD27b. So this is more the realistic number from today's point of view.

Next year's CapEx, as I said before, it's around TWD30b, it's around TWD30b. We -- our earlier planning I mentioned about TWD30b to TWD31b or TWD32b, but we believe it's around TWD30b for next year.

We are at the stage of preparing our budgets for next year. We have not yet finalized all these numbers.

The second question from Joseph Shieh.

Yes, what I say last time is 10% of our land is ready to be further development, which means about TWD10b worth of value land. And we plan to gradually, over next couple of year period, to transfer those then to our newly formed property subsidiaries. Thank you.

You are on the line. Go ahead please.

Hi It's Helen Zhu from Goldman Sachs. I have some follow up questions with relation to the capital management issue that we discussing earlier. Firstly, in terms of the stock repurchased, you said that it wasn't in the best interest of shareholder to continue. I was wondering whether you could elaborate? And also whether you would consider to do another share buyback next year?

Secondly, in terms of the capital management, the proposal, you said you saw a draft with the FSC. Is that draft to increase the transfer limit from 10% to 30%, or is it a more general upward revision?

And also if that doesn't go through, are you committed to doing another 10% in April this year -- of next year?

And then finally, I was just wondering if you could give us the CapEx spend breakdown between the Fixed Line and then the Internet and Data? Because I think previously you gave those two separate but in this quarter you lumped them together. Thanks.

Okay, Helen. The CapEx breakdown for this report we put together the Fixed Line and the Internet data together in as one line because we believe this is more accurately reflects the nature of our network and our operation. From now on we will do this. It's one line for Wireless or Mobile. Well is mobile okay.

The wireline spending up until -- it's already shown on this slide number six. Out of the TWD15.8b about TWD13b are from wireline and therefore, Mobile is about TWD2.4b.

Okay.

Regarding the buyback program and we have conducted a buyback last year and this year. For the remaining of this year and next year we will consider the buyback given the capital market condition is appropriate. So we don't rule out the possibilities.

About the capital management at 10% cap, we feel there's a pretty good chance that the FSC may be revise the 10% cap. If that's the case we will propose to the Board in AGM and to have a bigger size of the capital management.

And if the 10%, if the FSC does not change their upper inaudible), which mean there remain the 10% unchanged, we still consider to propose at least 10% transfer fund, keep a surplus in case capital stock and reduce those share annually the same as we did this year. And so okay I would say if it is possible to transfer more share to capital stock we would do that and it's propose to the Board. If that's not the case, and it is that we will do the 10% transfer and propose to our Board and AGM. Thank you.

Okay, thank you.

Operator. The next question, you are on the line, go ahead please. Hello, please go ahead.

Hi this is Frank Lim from Morgan Stanley. Just one question on the tax rate. It seems to date the tax rate has been quite volatile in the last few quarters and I'm just wondering if you can give us guidance on 2007's annual tax rate as well as 2008, that would be helpful? Thanks.

Well, the tax rate for this first nine months is about 21% and we would like to maintain this kind of effective tax rate. But it's difficult for us to forecast what will the figures for next year.

So for the whole year 2007, 21% should also be the number that we should be looking at.

It is so yes.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. You are on the line. Please go ahead.

Hi, it's Helen from Goldman again. I was wondering if I could just ask a couple of additional questions.

Firstly, China Mobile just issued fourth quarter guidance for their mobile business showing that they're expecting EBITDA margin to be down fairly noticeably versus the third quarter. So we were just wondering whether you have any comment on the competitive landscape outlook for the fourth quarter and whether you're expecting any kind of heat up of price war or subsidy action?

And then the other question I had is with relation to China Mobiles triple play plan which they're looking to launch in the first quarter of 2008. We were wondering whether you have any comment on that, any defenses, mechanisms or any thoughts on what the results of the marketing strategy maybe? Thanks.

Thank you Helen. The mobile market remains aggressive now in Taiwan and we believe the fourth quarter of this year will remain about the same. We don't believe there is to be a price war occur in this market. And Chunghwa Telecom we emphasis the quality of services and also to introduce innovative services to our customers and we will remain competitive in this market.

As to the triple play, everybody these days is talking about triple play and, of course, the other operators they have some plan and they announced to make some kind of promotion. We emphasis that Chunghwa Telecom is the leading incumbent with fixed line, mobile and Internet data services. We maintain very, very high quality of services and customer care. So we don't have comments on other operators promotions, but we emphasis this kind, purely this kind of period of competition in stay with Chunghwa Telecom is best policy for our customers.

Okay, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]. If there are no further questions -- You are on the line. Please go ahead.

Thanks very much for the call. It's Shirley Tse from UBS. I just have two quick follow up questions. First on the property subsidiary, would you be considering some land disposals as well as development of the land bank that you have? Or would that be predominantly cooperating with some developers in terms of developing the land and for revenue sharing purposes?

And secondly was wondering if you have any plans for any further employee reduction programs, and if so what would be the scale and timeline for that? Thanks.

As I mentioned earlier since we are having newly formed property subsidiary so we would gradually transfer land to this new subsidiary. And we don't internally, I mean under Chunghwa Telecom side we don't have any plan to dispose more land and for those unused then we will transfer and sell to newly formed subsidiaries. And whether they, this new subsidiary, will dispose of them or not, it will be their strategic decisions.

Since with the consideration of the land, the scarcity of land in Taiwan, probably we will prefer in the near future and we can -- and if we can keep land for a commercial building and rental outside and that'll be preferred. But for residential probably our newly formed subsidiary have this kind of potential purchase (inaudible) and this is regular practice in Taiwan.

And can you say again your second question?

Are there any plans to conduct further employee reduction programs going forward? And if so what would be the scale and timeline for that?

For the capital reduction program?

Employee.

Okay, I'm sorry, yes. For last few years we have conducted several tranches of early retire program and we, for the next year, we don't have planned to do further early retirement programs. We will fear that the cost step above 25,000 step is appropriate at this moment.

It ends up in general, as I said, in the second half -- the first half results call, that the Company's management is reviewing our headcounts requirement. And we don't have any particular plan for next year regarding headcount reduction but recently I have heard from some colleagues, they mentioning whether the Company will conduct similar programs next year because seems to us -- seems to them, those who raise this to me, saying that some of the employees are looking for such opportunity. So we may consider a small sized headcount -- early retirement programs next year. But at this stage it's no specific programs being set up okay.

Thanks. Can I just ask a quick question, a follow up to the capital surplus transfer? Can you just remind me quickly that apart from the -- after the SFC has drafted the regulations, does it require further approval by the Legislative Yuan or other regulatory bodies.

Are required. Regarding the (inaudible), the limit of the capital surplus, it's decision could be made by the SFC. It is just only regarding the operating law so it shouldn't be going through the legislative process.

Thank you.

Thank you.

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

Well thank you very much for participating in our third quarter's results conference call. Thank you very much. Good night from Taipei.

Thank you President Lu. That's all for today. 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 using Chunghwa Telecom audio conference service. You may now disconnect your line. Good night.