Chunghwa Telecom Co Ltd (CHT) 2008 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Chunghwa Telecom conference call for the Company's first half 2008 operational results. (OPERATOR INSTRUCTIONS). Now I would like to turn it over to Chairman Lu, the host of the conference. Thank you. Chairman Lu, please go ahead.

Thank you, operator. This is Fufu Shen, Investor Relations Director of Chunghwa. Welcome to our first half 2008 results conference call. Today we have Dr. Lu, our Chairman and CEO and Dr. Shieh, our CFO to speak to you. Dr. Lu will review our business outlook and Dr. Shieh will go over financial results and business operations. At the end of the presentation they will be happy to take your questions.

Dr. Lu?

Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first half 2008 earnings results conference call.

As I assumed this new position on August 20, I would like to promise that under my leadership the strategic priorities that we have previously communicated for our core business will remain effective.

First, please note, our Safe Harbor statement on slide number one.

Before I hand it over to Dr. Shieh, I would like to report to you that at the Extraordinary Shareholders' Meeting on August 14, two issues were approved by our shareholders. One is to increase the Company's capital stock by 20% from our capital surplus. The other is to subsequently reduce the capital stock by the same amount.

As a result of these transactions, we will reduce our total capital stock by about 16%, up to 20% capital increase from capital surplus. We expect the capital increase to take place in September. For the capital reduction, the trading suspension is expected to be between the end of February next year and early March 2009, just before the cash payment date.

Since the cash return is derived from our capital surplus and is deemed to be the shareholders' contribution, there is no tax issue in this regard. Please refer to the right-hand side of the slide for the calculation of the reference price following the capital reduction.

In the future, our capital management priorities will continue to be, first, investment in our core business which has always been our primary focus, second, M&A opportunities synergistic to our overall growth trends. Our third priority is to return cash to shareholders via capital reduction or share repurchase.

Dr. Shieh will now continue with our financial overview. Dr. Shieh, please.

Thank you, Chairman Lu. Please turn to slide four showing a simplified income statement on consolidated basis.

Our total revenues for first half this year were TWD100.9b; a 5.4% increase year over year. EBITDA increased by 2.6% to TWD51.5b. Operating profit increased by 6.7% to TWD32.3b. And the net income amounted to TWD23.2b, representing a decrease of 5.6%.

Revenue growth was mainly driven by the consolidation of our subsidiary Senao, and also a strong party contribution from our Internet and the data business. About the operating cost and expense, I will explain on the next slide.

While operating profit grew 6.7%, our net income decreased 5.6% in first half this year, year over year, due to the unrealized mark-to-market loss stemming from the foreign exchange derivative contract. But we expect to benefit significantly from the recent TWD depreciation in writing back some portion of accumulated [loss] for these contracts.

And on the right-hand side of this slide, and showing the quarterly result, you can see the net income remained flat as compared to that of the second quarter last year.

As shown on page -- on slide five, total operating cost and expenses for first half this year was TWD68.6b; an increase of 4.9% when compared to first half last year. As I mentioned on the previous slide, the increase was mainly attributable to the consolidation of our subsidiaries, especially Senao. For the parent company, total operating costs and expenses decreased by TWD0.42b, representing a year-over-year decrease of 0.7%.

For the second quarter of 2008, total operating cost and expenses decreased by 2.7%. And that decrease came mainly from declining personnel expenses and depreciation, since we did not provide an early retirement program this year until now and therefore incurred no related expenses.

On slide six we show the breakdown for -- revenue breakdown for each individual [PG] segment. The Internet revenue and the data revenue continued to increase due to increased broadband subscriber numbers and the successful initiatives to upgrade customers to higher speed ADSL and FTTx services.

On our mobile business, the positive effect of higher subscriber number, which increased by 2.3% to 8.8m compared to that at end of first half last year, was offset by a decline in traffic and the price cuts imposed by the NCC, leading to a 1.2% revenue decrease year over year.

On the fixed line, for local and DLD, ILD in the whole decreased compared to last year, but this is consistent with global trends. And you can see on the bottom is the other revenues increased by 123.3%, mostly from the consolidation of Senao. On the right-hand side showing the second quarter results, and please refer to that.

Now please turn to page seven, showing the -- our cash flow performance. You can see the free cash flow for first half this year increased by 31.4% when compared with first half last year. As the increase of CapEx was smaller than the increase in cash flow from operating activities, our cash and cash equivalent amounted to TWD95.4b at end of this year -- first half; an increase of 15.8%, despite the capital reduction cash payment of TWD9.6b in January this year.

Next, on slide eight, CapEx for first half this year was TWD11.3b; an increase of 16.7% year over year. This was mainly due to an increase in other spending of TWD1.2b for the purchase of State-owned land where one of our outlets is located. Going forward, our CapEx may increase due to investments focused on our core business and our efforts to migrate mobile and data customers to higher revenue platforms, including 3G/3.5G systems, IP-based NGN, FTTx and xDSL.

Now business overviews. On slide 10 you can see that Chunghwa Telecom total revenue for first half 2008 was TWD100.9b, of which 28.5% came from fixed line, 35.9% from Mobile, 24.6% from Internet and Data Service, and 11% from Other, which includes a new revenue stream from handset sales following the consolidation of Senao into Chunghwa Telecom.

Revenue from handset sales, including handset sales from Senao and Chunghwa Telecom, accounted for 8.2% of our total revenue. As a result, revenue for Fixed Line, Mobile and Internet and Data as percentage of our total revenue decreased due to these new revenue streams.

Chunghwa has a commanding first place market position for each of our [big] segments. Please see right-hand side table for statistics.

Next, on slide 11, I will review our broadband progress. Our broadband subscriber number continues to increase. Of the 4.3m broadband subscribers at the end of first half 2008, close to 70% used service with speed higher than 2Mbps. Internet value-added services drive the broadband service revenues. Top contributors include Land Administration Information Service and our Internet pornography gatekeeper, which accounted for 32% and 9% of VAS revenue respectively.

The fastest growing VAS are Internet advertisements and Internet pornography gatekeeper which exhibited year-over-year growth of 111% and 81% respectively as of June 2008.

Total broadband access revenue was approximately TWD10b, which was 0.8% higher than that for the prior-year period. The growth rate is lower than before due to the tariff cuts imposed by the NCC.

Now, as shown on slide 12, our key initiatives for the broadband business are, first, to migrate our customers to higher access speeds and, second, to increase -- to continue to increase our fiber coverage by deploying fiber networks in residential buildings, campuses and commercial buildings, allowing more opportunities to access and adopt a variety of Internet value-added services.

These initiatives have shown satisfactory progress. As you can see on the right -- left-hand side of this slide, the average bandwidth per user continued to increase over the last few years and reached 3.9Mbps as of first half this year. In addition, about 1.4m broadband subscribers utilize a service speed of at least 8Mbps, representing about 32.1% of our total broadband subscribers.

The number of fiber subscribers has also shown strong growth, with 782,000 subscribers at end of first half this year. In addition, I would like to emphasize that the 16,400 plus buildings to which we offer fiber access service represents about 90.7% market share. Going forward, we expect this trend of growing broadband business to continue.

Now I want to talk about the Mobile operations. Chunghwa Telecom has maintained its number one Mobile market share position. As shown on slide 13, at the end of this year first half, we had 8.8m mobile subscribers, including 2.9m 3G customers. 3G subscribers as a percentage of the total Mobile subscriber base has continued to increase. Of the 2.9m 3G subscribers, 70% utilize 3G handsets. In addition, 11.6% of 3G ARPU was from data usage, compared with 7.6% for 2G ARPU.

Moving to slide 14, I want to provide some more detail on our 3G initiative for our Mobile business, especially value-added service. For business customers, we offer a customized service called mPro, along with customized handset models. In addition, we keep enhancing service on both the server and the user end to meet and exceed the requirements of this important market segment. ARPU for mPro service subscriber was TWD1,650, of which TWD500 is from VAS usage.

To attract young customers, we offer mCool services, with optimized and affordable VAS packages and handsets. ARPU for mCool users is TWD990, and TWD55 of that is from VAS usage. We anticipate to have 100,000 subscribers for both mPro and mCool service by the end of this year.

During first half this year we were encouraged by our mobile VAS growth, primarily due to the success of our exclusive mobile VAS platform, emome. Total VAS grew by 31.7% year over year. Of this, Mobile Internet experienced the highest growth, which was 58.2%. As a result, Data revenue as a percentage of Mobile revenue increased to 9.4% for this year first half.

Next, on slide 15, we review the Fixed Line segment. As an incumbent, we had a stable market share for local DLD and ILD business. We have been successfully defending our Fixed Line market share and are confident that our strong market position will sustain.

Regarding to our convergence service, you can move to slide 16. Let me update you on our progress in convergence services. By the end of first half this year there were about 508,000 IPTV subscribers; growth of 29% as compared to the end of last year.

Furthermore, we are continuing our effort to construct a user-friendly platform and to enrich the content. This platform includes MOD for IPTV, emome for Mobile services, and hiChannel for ISP service. To explore synergies of these three platforms, we conduct cross-platform marketing and advertising operations.

We also provide integrated bills for multiple services as a convenience to customers and to streamline our own operations. Finally, we are improving our customer interface to enhance customer loyalty. Here, we are focusing on promoting the ever-popular sports programs over the three platforms.

We will also keep enhancing the content of other VOD and providing interactive value-added services, such as games, karaoke and exclusive services for corporate customers. To provide high quality services, High Definition TV programming has been available for documentary and feature films, as well as the Beijing Olympic Games.

Now I want to talk about the result we gained from the Olympic Operations. The 2008 Olympic Games were truly a great event for us. We were able to increase our IPTV and fiber subscriptions, leveraging this worldwide event. Specifically, IPTV or MOD subscriptions increased 14.3% in August 2008, compared to the average monthly subscription from January to July this year. Fiber subscription also increased 6% in August with respect to the same timeframe.

The 2008 Olympic Games also played an extraordinarily important role for the growth of VAS across our three platforms; MOD, emome and the hiChannel platform in August. According to our internal statistics, during the Olympic Games, from August 8 until August 24, the highest number of view households for MOD was up to 1.6 times compared to before the Games. hiChannel visitors was 3.3 times and the page views amounted to 11.3 times compared to before the Games.

Number of video clips viewed, page views and the traffic over our mobile portal, emome, were 15.8, 10 and 10 times respectively as compared to the period before the Games. As a result, we are pleased of our successfully promotion for Olympic Games broadcasts. Through this event we were able to enhance leadership in the new media, improve our branding and reaffirm our expertise.

This completes my business review. Now I will pass the call back to Chairman Lu for our business outlook.

Thank you, Dr. Shieh. Next, I want to take a few minutes to discuss our business outlook.

Chunghwa Telecom is the leading integrated telecom operator in Taiwan. One of our strengths is our ability to upgrade our infrastructure and to offer new services or better services to our customers when there is a new development in telecom technology.

As originally announced in 2006, the deployment of Next Generation Network is one of our operational priorities at this stage. The NGN will consolidate our existing diverse networks, including PSTN, Mobile and Internet, onto one single comprehensive IP-based network. With this solid foundation we are capable to develop versatile new multimedia value-added services.

The IP Multimedia Subsystem, or IMS, will be used to aid multimedia and voice applications across wireless and wireline terminals. For the application layer we will introduce an open service platform in order to open the NGN functions to external service applications. This means that whenever a provider wants to enable a new service, they can do so by defining it directly at the service layer without [considering] the transport layer.

The bottom line is that through the use of different access networks on the NGN, we will be able to consistently provide the same level high quality service for customers, no matter what device the customer is using for calls to access such services, whether it is a mobile handset, PC or fixed line phone.

Slide 21 shows the roadmap for our NGN project from 2006 to 2013. The NGN project involves three main transformations; switching network, backbone network and access network transformation. For the switching network, the existing class-4 and class-5 circuit switches will migrate to IMS. We expect to complete the transformation in 2014.

For the backbone network, we will support quality-of-service-enabled services and adapt MPLS by consolidating the IP backbones. In the meantime, we will introduce NGSDH, ROADM and OXC technologies to optimize the performance of the transport network.

For the access network, on the wireless side, we will expand 3G and HSPA to boost Mobile Internet applications. We are also keeping a close eye on the development of LTE, 4G and WiMAX.

On the wireline side, our main strategy is to replace copper wire with FTTx technologies. At present we are promoting FTTN and FTTB, and expect to speed up the FTTH deployment in 2011. As of today, construction of all strategic networks is on schedule.

Next, on page 22. Specifically for the access networks, our broadband construction and the fiber deployment plans is illustrated here on this page. Based on our current projection, fiber access will likely to exceed that of ADSL by year 2011. And by the year 2013 we expect fiber's residential coverage to reach 83%.

In addition, we anticipate significant growth in wireline VAS revenue in the next five years, while broadband access and the broadband ISP to grow slightly. Currently, the wireline VAS contributes about 6.3% of total wireline revenue.

With high-speed access, consolidated IP core network and IMS platform, the NGN will lay the foundation for us to develop new multimedia value-added services. We will be able to meet demand of multiple markets which we classified into home market, personal market and enterprise market.

For example, for the home market, the so-called digital home services, such as entertainment, surveillance and healthcare will be some of the new opportunities for us to explore.

For the personal market, the combination of broadband and mobility will enable us to provide advanced new services, such as video phones, m-commerce and location-based services.

For the enterprise market, we can help to enhance our clients' competitiveness by offering services, such as mobile office, fixed/mobile convergence and IP-VPN.

Last, but not least, on our operational priorities, we are at a very important and exciting time in our industry. There are many opportunities. But let me emphasize that we are, and we will be, focused on our core businesses. We will continue deploying NGN network and optical fiber based local loops. We offer triple-play or multi-play service over this broadband infrastructure.

We will also continue to enhance our 3G/3.5G Mobile services. In addition, we want to promote more innovation. We will encourage all innovative efforts in new products and services development that will make the best use of our infrastructure and the service platform capabilities.

The scope of our business will be enlarged to include certain areas in information and communication technologies, ICT, intelligent transportation systems, ITS, and applications that will enable low carbon economy in the information age.

An example is our intelligent energy-saving solution, iEN, for commercial buildings. In about two months of offering, we have received over 150 enquiries and more than two thirds expressed strong interest in accepting such solution. All these are from our enterprise accounts.

We will continue our work on property revitalization so as to generating value out of our existing assets. We will explore overseas business opportunities, but with prudence. Furthermore, we will continue to operate under the corporate social responsibility framework.

Finally, to make all of this happen, we ought to make the best use of both our human and capital resources. We were able to succeed so far, primarily due to our talented and dedicated employees. We want to encourage continuous out-performance among our employee base. In addition, efficient capital management has been, and will continue to be, a priority item at CHT.

Now we will be happy to take your questions. Thank you.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of John Kim with Merrill Lynch. Please proceed.

Yes. Thank you for the opportunity to ask questions; I have three. First, congratulations to Chairman Lu for your appointment.

As a new Chairman, but also as an executive who's been with Chunghwa for a long time, what are some of the changes or new initiatives that you have in mind for the Company during your tenure?

And, second, could you please share your thoughts and expectations for changes that you anticipate from the new NCC?

And third, and last, is a lighthearted question. I recall that your 2008 strategy was three Os. But now that the Olympic Games are over, what are you going to replace the last O with?

Well, thank you very much for your encouragement. Well, as I mentioned during the last part of my presentation on the operational priorities, Chunghwa Telecom has very sound [capabilities]. And I happen to be the one with all these [sound capabilities]. And I would like to continue to lead the Company to be very much focused on our core business.

And, as I said, the scope of the business to be enlarged, to include ICT, and certain areas of ICT, because ICT is very broad. We ought to be focused on certain areas in ICT, and also on low-carbon economy now. And especially ICT can help other industries to reduce or to better use of their energy. And we have some success stories. So we would like to pursue along this revenue. And this is very timely.

So I'm saying that we will be focused, and we will be focused on the area where we have expertise. And as I said also during the last few sentences, I would like to remind our human capital with all these needs, in our new opportunities. And this will be the priorities for me.

And the changes from new NCC, there are now seven members. And the new Chairwoman and Vice Chair have already been elected. I believe the current composition of NCC members are much better than the first term, the 13 or nine members during the first term of NCC. It's much more -- it has the right -- I believe it has a much better composition of expertise among commissioners.

We would like the NCC to be more rational in setting the stage for converged -- digital convergence to happen. And not much has been heard from NCC. So we will monitor it what's their priorities. Remember, today, the Chairperson led the team to the [Lanto], the mid -- the central Taiwan area for one of the activities they are very much focused on, and we participated in this. And one area I also understand of their focus is about universal service, and I believe Chunghwa Telecom can contribute in this area.

The three Os mentioned -- pointed out by our ex-Chairman, Ho Chen. And Dr. Shieh elaborate a little bit on our -- some elaboration on our experience with the Olympics. It's a great event and we gained -- the [forecast] or the availability of the Games from our three platforms is well received in Taiwan. And this really set the stage for real media in Taiwan. And we will continue offering good sports, among other content and programs in MOD, in our emome platform or even in our hiChannel platform. And so we have -- we believe we are doing quite well in these 16 days.

The three Os; the first O represents optical. And optical, very simple word. Really means NGN and fiber through the X solution is the infrastructure we are constructing at this stage, and we will continue this. And this is the foundation for our new services.

And the second O is overseas. And I said that we will still continue exploring overseas opportunities, but with prudence. So that's my answer to your questions.

Thank you.

Your next question comes from the line Lei Tang with Lehman Brothers. Please proceed.

Hi. Thanks very much for the call. I have two questions. First, can you give us an update on your overseas strategy, especially with regards to China after opening up new offices?

Second, are you still considering an early retirement program for the second half? And, if so, have you decided on total number of reductions? Thank you.

Okay. Let me answer the second question first. The early retirement programs, we are at the stage of formulating a plan. Maybe this will be available toward the end of September and then we will reveal whether this plan is feasible. If it is feasible then we will conduct it probably at the fourth quarter of this year. And, since the premise under formulation and I have no target numbers at this stage, we will review the proposal.

And the overseas strategy, let me put it this way. To explore overseas opportunities, we ought to understand and be knowledgeable abut the targeting country. This is number one. Number two is we ought to know the culture and also the marketplace and, hopefully, it's not too far away for the -- hopefully it's not that far away.

And the third is we would like to start with small and to gain experience because this is new. We better test the water. And if we understand the pool is the right temperature, then you dive in. Otherwise, stay away.

About China, China is a very interesting market and a large market. We certainly would like to see if there is opportunity for us. And that's why we will open two offices, one in Beijing and one in Shanghai.

The office will help us to, one is to collect information and find potential partners there. Second is to help our operation, to take care of some of our enterprise accounts who are investing in Mainland China. Somebody there can help to communicate with the local office from either China Telecom or the new Unicom, or even China Mobile. It's very important. So that's the purpose of opening a representative service -- an office there.

There are certain regulations that we need to observe. One is the regulation imposed by Chinese companies. And another one is our own regulations here in Taipei. And, if it permits, then we probably will try to start with small, as I said, to see if we can really perform in that market. Currently, we have no specific plan.

Thank you.

Your next question comes from the line of Anand Ramachandran from Citigroup. Please proceed.

Yes, hi. Thank you. Good evening and, Chairman Lu, let me add on the congratulations to the pleasing promotion, and my best wishes.

I have three questions, sir. Firstly, if I look at the slide you've put up in the presentation, I think it's page number 21 on the network convergence and the network convergence and the NGN roadmap. Could you give us some color on what kind of CapEx plan we should be expecting over this five-year period and whether there are any changes to your CapEx plan for this year?

My second question would be on the MOD subscribers. You've obviously crossed 0.5m subscribers now. Is there any data that you see emerging on ARPUs or on the number of paying subs that you'd like to share with us?

And my third question would be on the derivative contract. Has there been any progress on that? Is there anything like trying to knock it off, or is it just going to stay the way it is for the original terms? Any update on that would be useful. Thank you so much.

Okay. I'm Joseph Shieh, CFO of the Company. Maybe I just -- I can answer the third question you just mentioned about foreign exchange [derivative] products. And toward the end of the July the mark-to-market loss, [unrealized] loss for this country is about TWD3.16b. But since the -- in August, the (inaudible) TWD depreciation and we hope to be writing back a significant portion of this unrealized loss.

And we are -- we will consider several options to try to maybe hedge or partial unwind, or even unwind, if the TWD approach a depreciation level further which means very close to (inaudible) dollars. But now I'm not taking -- making any strong conclusion right now because we still have several option on conservation. But, actually, we watch this currency closely and very dynamically. And we found now is very good timing and very good position to see the -- all the option we're already evaluating. And so the option you just mentioned, unwinding or (inaudible), all will be considered. Thank you.

Okay. Your first question is related to our NGN, these projects. The total CapEx for this project including, of course, the core network and also the access network, the core network requires about TWD102.6b CapEx for five years. And the access, especially the fiber solution, FTTx project, for five years is about TWD50b.

This all the CapEx involved in this entire program. And all this is within our budget. And we are able to fund all the required CapEx. For the MOD, currently we have about -- over 570,000 subscribers. And during the -- in August, this month, the new applicants amounted to about 66,500 customers, the applicants for this month.

The ARPU for MOD service is about TWD107 at this stage. Of course, our target is to increase ARPU and also increase the number of subscribers along the way. And thank you very much for your kind --

What percentage of these subscribers would be paying subscribers?

Paying subscriber, yes. All are paying subscribers, yes.

Okay. And if I could just quickly follow up. Therefore, we should basically expect that the CapEx plan for the next five years should be very much as what you have indicated earlier, around 30b, give or take, per annum.

Yes, because this is a very important period for infrastructure investment.

Yes. Thank you so much.

Thank you very much.

Your next question comes from the line of Terry Chan with Credit Suisse. Please proceed.

Hi. Thank you for the call. I have two questions. The first one is, assuming TWD remains stable at current level around 31.5, how much do you expect to write back in the third quarter? Do you have some estimate for it?

My second question is, could you give us more colors on your land development project because I heard you have just announced another project which is commercial building project? Can you give us any color? And you did say to expect you will continue exploring the land value in 2009. Thank you.

Okay. About the first question is now the foreign exchange level for TWD is close to 31.5. And there are at least five [sector difference] in the valuation of these foreign exchange contracts. And I can just tell you is, if the foreign exchange level still remain in this level, like 31.5, we will in writing back a very significant amount of the unrealized loss. For example, in -- I can't give it right now.

Maybe tomorrow is the last day of -- last trading day of this month. And I -- once I got the closing price, we will use the financial model to figure out, but at this moment I can't give you the exact number.

About the land policies, we -- given our cash-rich balance sheet and also the -- you see from the reports, the Taiwan property market has a little bit slowing down. And for this -- for (inaudible) development projects and our approach is taking long-term approach for our property management. And, first of all, we will continue rezoning our effort and continue our rezoning policies. And then we will wait for the strengthening of the property markets. Then we will, case by case, and periodically bring the good projects through our markets.

But I want to be clear again, we are taking the long approach. And we are also more focusing on the rental income. Although we don't rule out the possibility, we also may have the same capability from some residential buildings but, for long-term approach, we are more focused on rental revenues.

Okay, thank you. And I have follow-up questions. Can you repeat the total budget for the NGN? Sorry, I missed it.

The total budget for NGN (multiple speakers) --

CapEx budget.

-- is in two parts. One is the core network. For the core network, it's TWD22.6b. And for the access -- access network, especially the fiber solutions, FTTx, FTTB, FTTN, and eventually FTTH, the total amount we budgeted for -- we planned for five years, it's about TWD50b.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS). And your next question is from the line of Kathy Chen with Goldman Sachs. Please proceed.

Hi. Thanks for the call. I have three questions. Firstly, we've been seeing quite a bit of mobile revenue softness in the industry. And it seems like recently, for Chunghwa's trends, the [Mobile] trends have been soft, as well. And it looks like mostly it's coming from ARPU weakness. Do you think you can provide some additional color on what you're seeing and what's driving these trends?

My second and third questions are follow ups to previous questions, one is related to the overseas ventures. I know in the recent Board meeting, there was approval to, I think, further inject about 3b into a Singapore venture. Can you talk a little bit more about this specific venture?

And also, in the same Board meeting, there was also approval on the Taipei 101 investment. Can you share with us how much that investment is? And how does this tie into your core business strategy? Thanks.

The Mobile business in Taiwan, still is large. The mobile market is still, I believe, rational, but with certain [discrepancies] because some of -- some more operators, they offer very sweet packages to customers. And so that has some impact on the traffic volume and also from our ARPU. And our strategy to take care of this kind of market situation is to promote value-added services. And also, for a selected segment of our customers, we offer customized handsets, and also promoting data card usage. And all these efforts help to minimize the negative impact from some of this smaller operator.

On the overseas project, you mentioned about the recent Board of Directors meeting passed investments in Singapore. Due to our agreements with the party, we are not able to make any disclosure at this stage. And when the time has come, we will disclose what's involved in this program.

And the Taipei 101, we will participate in this capital increase program in the Company. And we just [borrow] the current percentage of our ownership. We just participate. And we believe, by doing so, it's protect our interest in this investment.

Thanks. Actually, I have one follow up on the line about competition. Can you also talk about what you're seeing on the Fixed Line side, as it seems like we've been hearing some noise from both [Power Mobile] and [Graystone] about talking about building out more of their own backhaulings with their sister fixed line companies. So are you seeing any impact there on your own Fixed Line business?

Well, yes, the market is rather dynamic. We do not expect everybody stand still every day. So certainly there are some movements in the market and we observe what's happening. And we monitor their activities quite closely. And let me assure you that our market share for broadband access remains high, at 85%. Maybe our competitors they have -- they offer some attractive packages to customers, but I believe the quality of service still remains the top priority for our customers. And we will maintain this kind of commitment to our customers.

Okay, thank you.

Okay, thank you.

Your next question comes from the line of Henry Cobbe with Nevsky. Please proceed.

Hi, there. Thanks very much for the call. Could you just give more detail on how the CapEx -- the NGN CapEx will be phased? Will it be front-loaded in the next few years or will it be spread evenly? And what annual CapEx budget are you targeting?

Well, when we draw up our annual plan, we will have very specific numbers for each year. And I don't have the sheets with me, all this projection of CapEx for the next five years. And it's -- for the first two or three years, it's relatively small. And the peak will be at the year -- the third or fourth year, something like that.

Okay. So what will be the starting rate, for example, this year and next year?

Well, last year was the -- it's still two years. So next year, probably we will have higher CapEx. And the total CapEx will be between TWD30b to TWD34b.

For 2008?

It will not exceed TWD34b.

For 2008?

For 2009 or 2010, yes.

Okay. Thank you very much.

Okay, thanks.

And your last question is from the line of Mitchell Kim with Morgan Stanley. Please proceed.

Yes, thank you. I have two questions. First question is on your overall long-term strategy of maintaining or even improving your margins. If you look at your first half revenue, excluding others, that includes -- which would encompass handsets and what not, you actually show a decline in revenues -- overall revenues. With revenue under pressure, what is it that you plan to do to maintain your margins over the next 12 to 24 months, whether -- if it is on the cost side or what areas of cost do you think you could curb in order to maintain your margins?

And related to that, do you see -- which areas do you see with the most risk in the next 12 months, in terms of revenue decline?

My second question is on your free cash flow. It appears that in second quarter your free cash flow improved, even though your EBITDA remained virtually the same and CapEx actually rose slightly. So could you just explain why free cash flow increased? I would appreciate that. Thank you.

Okay. The first question is related to our margin and long-term outlook. First, let me emphasize that the current situation, some decline in our Fixed Line and also -- you also saw the Mobile. The Mobile, because of NCC imposed this X value -- adjustment on the X value in the tariff regime. And also, on the broadband access, it's -- again, the NCC is -- it's the regulation.

Actually, the number of customers and the traffic is still growing. So we believe the market situation is not deteriorating in the sense of usage. So we would like to focus on our core competence, and we will emphasize more. We will bring more products, especially to our enterprise accounts. And we hope that this kind of effort will offset the declines in other areas. So, on the revenue side, we will do our best to sustain our revenue.

On the cost side, as you probably noticed and also Dr. Shieh mentioned during his presentation, that the personnel costs still declining and depreciation is still declining. And due to competition and our expense for marketing, and also some Interconnection increase because of traffic, it's increasing. So we will control our costs through a more efficient use of our manpower. And, as I indicated, although we do not have a definite plan at this stage, we might, or we may, come up with an early retirement program. That could be, not guaranteed, could be implemented during the fourth quarter of this year.

Some risks? Well, competition, as I said, not everybody stands still. And we just want to see Chunghwa move much faster and to get some gold medals. We monitor this market and we also gauge the competition. We will try to minimize our risks as much as possible. One area where it's possible, we would like to increase ARPU from our MOD service. And if regulation is such that we are not able to do so, that could be one of our risk area, not to be able to raise the ARPU as we desire.

On the cash flow -- free cash flow.

Yes, regarding the margin you mention about is for the Chunghwa Telecom standalone. Actually, our margin is about 54% -- EBITDA margin is the same -- close to last year. Actually, it's not declining. But if on consolidated basis, if we adding the subsidiaries now, then our EBITDA margin is close to 51%. So that's because of the -- on consolidation basis.

Regarding the cash flow, the high free cash flow is due to the fact we have a low capital expenditure for the first half; only TWD11b. And that's why we have the high free cash flow. Thank you.

Okay. Thank you very much for participating in this conference call. And we will do our best to sustain our value or even to improve our value to all our shareholders. Thank you again. Goodnight from Taipei.

Thank you, Chairman Lu. That is all for today's conference call. Replay details will be available on CHT website at http://www.cht.com.tw/ir.

Thank you for participating in today's conference. You may now disconnect. Have a great day.