Chunghwa Telecom Co Ltd (CHT) 2009 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the Company's first half of year 2009 operating 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. For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cht.com.tw/ir under the In Focus section.

Now I would like to turn it over to Fu-Fu Shen, the Director of Investor Relations. Thank you. Ms. Shen, please go ahead.

Thank you, operator. This is Fu-fu Shen, Investor Relations Director of Chunghwa. Welcome to our first half 2009 results conference call for Chunghwa. Today we have Dr. Lu, our Chairman and CEO; Mr. Chang, our President; and Dr. Shieh our CFO to speak to you and answer your questions.

On today's call, Dr. Shieh will review financial results first. Then Mr. Chang will review our business operations next. And finally Dr. Lu will review our business outlook. At the end of the presentation we will be happy to take your questions.

Now I would like to turn the call over to Dr. Lu, our Chairman and CEO.

Thank you, Fu-fu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first half 2009 earnings results conference call. As usual, please note our Safe Harbor statement on slide number one.

Now let me start by providing updates in three aspects. First on behalf of Chunghwa, I would like to thank you all for your kind concerns regarding the recent Typhoon Morakot in southern Taiwan. We are all very saddened by this incident. And our thoughts and prayers go out to all of the victims and their families affected by this tragedy. Fortunately, none of our employees were injured, although some of our operations temporarily affected. As of today, we managed to restore almost all of our services, some with temporary measurements -- measures. As a result, we expect no material financial impact. So we currently uphold our recent third quarter '09 guidance as previously announced.

Secondly, I'm pleased that in recent AGM our shareholders have approved the third round capital reduction program. We will increase our capital stock by 10% from our capital surplus and cancel the increased amount afterwards. Total cash amount to shareholders from this program is estimated to be TWD9.7b. Because of capital reduction program, we will distribute a 10% stock dividend along with the regular cash dividend.

Finally, on August 25 we announced that starting on September 1, 2009, the Company will redefine its financial reporting segments into five operating segments. Prior to September 1, 2009 we had seven operating segments. The redefinition of the Company's operating segments is expected to facilitate the management's ability to assess the performance of each operating segment by conforming the Company's operating segments to the international trend of other telecommunication companies in general, thus better align our internal metrics in reporting and in communicating to our shareholders and investors.

As part of the redefinition, certain items have been redefined from one operating segment to another. The charts on slide number three set forth a description of which items are included under each of the operating segments for the old and the new segment reporting. Please also refer to the appendix for the first half pro forma operating segmental information.

Now I will hand over to Dr. Shieh to report on financials. Dr. Shieh, please go ahead.

Thank you, Chairman Lu. And thank you all for joining us.

Please turn to slide five. It shows our income statement highlights on a consolidated basis. Our total revenue for the second quarter of 2009 was TWD48.1b, 3.8% decrease compared to the second quarter of 2008. The primary reason for the revenue decline was the deteriorating economic environment, and the market competition, which resulted in the reduced traffic for the fixed line and the mobile business.

In addition EBITDA decreased by 5.2% and operating profit decreased by 5.9%. The reasons for these declines are due to revenue decreases, which I will cover next. However both EBITDA and operating profit margins are relatively stable.

Net income decreased by 8.3% compared to the second quarter of 2008, more than the operating profit's decline rate, mainly due to the reduced interest income generated from the low interest rates.

As shown on slide six, for the second quarter of 2009 total operating costs and expenses were TWD33.1b, a decrease of 2.9% compared to the second quarter of 2008. This decrease was mainly due to the decrease of our subsidiary Senao's operating costs, which resulted from a decrease in Senao's sales. As well as the decrease in the parent company marketing expenses and the depreciation expenses.

And on slide seven we show the revenue performance for each business segment. On our mobile business we made progress by increasing our subscriber number by 2.95% and by enhancing our value added service revenues by 11.32% compared to second quarter of 2008. However, these successes were offset by the economic downturn and the market competition.

Next our Internet & data revenue in the first half slightly decreased by 0.2% year-over-year which was mainly because of tariff reduction for HiNet and ADSL.

In the fixed line business for second quarter 2009 local and domestic long distance revenues decreased by 5.4% and 10.9% year-over-year respectively. The decrease was mainly due to the economic downturn as well as the mobile and the VoIP substitution. International long distance revenue decreased by 6.3% which mainly resulted from the economic downturn, VoIP substitution and the market competition.

Other revenue decreased by 9.7% in the second quarter 2009 compared to the same period last year mainly due to the decrease of handset sales.

Regarding our cash flow performance, it is shown on slide eight. For the second quarter of 2009 our cash flow from operating activities decreased by 26.4% to TWD18.2b. This was primarily because of a decline in revenue which led EBITDA to decrease by TWD1.3b as well as the TWD3.2b income tax refund the parent company received in the second quarter 2008.

Free cash flow for the second quarter of 2009 decreased by 33.3%, compared to second quarter of 2008, mainly because of the decrease in cash flow from operating activity.

Our CapEx continued to decrease year-over-year as we become more vigilant on our spendings. As a result, our cash and cash equivalents amounted to TWD83.4b as of end of the second quarter 2009. This represents about 12.5% decrease compared to the same period last year. And the decrease was mainly because of the cash payment from previously completed capital reduction program.

Next on slide nine the total CapEx for the first half 2009 amounted to TWD10.3b, a 9.0% decrease compared to that for the same period in year 2008. Within the TWD10.3b CapEx figure, 73% was wireline, 31% was for wireless and the remaining for other capital expenditure.

Moving forward, in supporting our next generation network and other investments focusing on CHT long-term core business opportunities, we expect our CapEx spending to remain no more than the 15% level of our annual revenue over the next five years.

This completes my financial reporting. I will now hand over to President Chang for the business review.

Thank you, Dr. Shieh. Now let me take you through the business operation for CHT.

As you can see from this slide 11, our consolidated revenue for the first half 2009 was TWD97.2b. And we were able to maintain our leading market position in each of our business segments throughout the second quarter. We have been successfully defending our fixed line market share, and are confident that our strong market position will sustain.

Next on slide 12 is our broadband subscriber data at the end of the second quarter this year. Total market broadband subscribers reached 5.06m representing 66% household penetration. Chunghwa is the largest broadband service provider with 83.7% market share at the end of the second quarter. Since the broadband household penetration is very high -- it's already high, our primary aim is to -- is not to grow the subscriber base. Instead we are focusing on upgrading subscriber to higher speed fiber service for potentially higher revenue contribution.

Additionally, in facing the competition from the cable operators, we are retaining our low speed subscribers through competitive price by offering sub-brand ISP service via one of our strategic partners, as well as offering customized service package to various residential communities. Moreover we will continue to promote Internet value added services which are the fundamental growth driver of our Internet & the data business.

Please refer to slide 13. We had 9m mobile subscribers at the end of June this year. Although we were able to accumulate more subscribers throughout 2009 so far, and our mobile churn rate was consistently being the lowest amongst the telecom providers, total mobile revenue declined slightly in the second quarter this year primarily due to the economic downturn and the market competition.

In order to mitigate the decline, we plan to continue our segmentation strategy, catering to different types of users through various services, promotions and device offerings. In addition we will focus on 3G value added services to meet the various user demand on applications, thus increasing the usage frequency.

Last but not least, we are committed to advance network development in enhancing our overall service quality for all users as well as further streamline our network efficiency.

Now on slide 14. In order to drive mobile value added service usage and increase mobile revenue, we are collaborating with world class manufacturers to provide handsets with advanced features and enhanced interfaces. We are constantly expanding our handset models in catering to the evolving needs of our customers.

In addition, our value added service packages are also designed for various segments of customers. Our value added services platform Hami, is our brand name, can deliver popular services such as music, location based service and so on for selected handset models.

In terms of the average value added service revenue contribution based on the average bill per user, we are pleased to see that, in addition to the data card users, our segment target package such as mPro and mCool users exhibit even higher value added service contribution compared to those of the 3G user. We will continue providing these value added services, and the desired handsets in meeting the evolving preference of our many subscribers, in order to enhance their user experience and loyalty.

As shown on slide 15, by the end of June this year we accumulated 660,000 IPTV subscribers representing a 29.7% increase year-over-year. The slight quarter-over-quarter decline was mainly due to a temporary glitch on content provision from our terrestrial TV program partners and we do not expect a significant subscriber impact moving forward. In addition, based on our analysis, those users who discontinued this service in the second quarter were mostly low ARPU users.

In addition, the Household Using Television for second quarter this year is 3% higher than the first quarter this year. We've been strengthening our IPTV strategy in terms of content, making -- marketing and interactivity. To give some examples, we are continually increasing our SD, HD and SVOD content including movie, drama, animation and the documentary.

For interaction, games, karaoke on demand and home banking are becoming more popular. In addition, we started cooperating with the famous TV series, "Mom's House" to provide interactive real time voting since July this year.

Besides NBA, Super Basketball League and the Nippon Pacific Basketball League are all live broadcasted across all of our MOD, HiNet, emome platforms. The World Games 2009 Kaohsiung, was live broadcasted on these three platforms as well.

We are committed to our IPTV strategy and will continue its execution in order to complement our existing service. This completes my core business review.

Next I would like to provide an update on our property management.

As shown on slide 17, as you may know, CHT had over 2,700 pieces of land spread out in Taiwan for a total of 4.09m square meters and over 1,800 buildings totaling about 3.5m square meters. The total current book value is about TWD150b.

In terms of our current development, we have a total of six pieces of land amounting to over 15,000 square meters being developed as residential buildings. Four of these are in Taipei City, one in Taipei County and one in Central Taiwan.

We currently expect this land development to be completed and to start to contribute revenue from about year 2011 and 2012. Since this land development are under our subsidiary LEDC, we estimate to recognize a one-time revenue of about 2% to our total revenue. In addition, the Company is expected to invest about TWD1.5b to TWD2b in total from 2007 to 2013 to complete the land development.

In addition to the land, we also have two commercial buildings in Taipei City under development. Over 43 -- 47,000 square meters. These are office complexes. We currently expect these buildings to be completed in years 2010 and 2013 respectively and start to contribute to rental revenue. On a steady state assumption, we estimate the annualized revenue contribution from these buildings to be about 0.15% to our total revenue. In addition we currently expect the investment about TWD1.5b to TWD2b in total from 2007 to 2013 to complete this buildings development.

Our overall property strategy and midterm strategy are shown on slide 18. As mentioned before, our primary focus will be rental revenue in terms of our development focus. The near-term developments are mostly concentrated on well-developed areas in prime locations, so that our incremental development efforts are less, especially with good developer partners. For the mid-term, we are focused on developing areas and the under developed areas for a longer term.

The nature of our developments will primarily be commercial, residential as well as office complex. In addition, our action plan is to lease out any of Chunghwa Telecom's unused buildings and floor space. As a result, the primary revenue source from our property development effort will be a stable stream of rental or leasing revenue with certain visibility.

Over the next five years, in terms of our target, excluding what I just mentioned in the previous slide that is currently already under development, we plan to develop another seven pieces of -- land totaling over 33,000 square meters. All of these lands are in major cities, including Taipei, Taichung and Kaohsiung. The land development will be used primarily for office complex and business accommodation.

We expect to spend about an additional TWD4.5b to TWD5b on this development from 2010 to 2014. Once completed, this development is estimated to generate about 0.25% annualized revenue to our total revenue.

Now I'll pass the call to Chairman Lu for our business outlook.

Thank you, Mr. Chang. Now I would like to make a few comments on our business outlook.

As shown on slide number 20, our mid-term corporate strategy is primarily centered on enhancing competitive positioning, exploring non-core business operation and implementing corporate social responsibility. Specifically, we plan to sustain our dominant market leadership by enhancing core product features or functionalities, providing differentiated and even customized services, as well as innovative devices to match the ever evolving preferences of our users.

Also, we will continue focus on ICT related services to better serve our corporate clients. At the same time we will continue advanced network deployment to stay ahead of the industry transformation. In addition, we will continuous streamline operational efficiency to better support our core business competitiveness, and advanced technology development with still improved cost management.

Next, for our non-core business, we will focus on exploring mainland China and overseas emerging markets for new revenue opportunities, as well as leveraging our existing property assets to enhance non-operating income.

Last but not least, we stand firm on corporate social responsibility implementation and commitment.

That concludes my presentation. Now we will be happy to take your questions.

(Operator Instructions). The first question is Lei Tang from Nomura. Please begin.

Hi. Thanks very much for the call. I have two questions. First on the regulatory side, should we expect further tariff cuts for NCC and what would be your expectation for the magnitude of these cuts, if possible?

And second on capital management. With the proposed change in the Company Act, would the Company consider taking out dividend payouts from the reserves to replace the capital reduction, or are there any other considerations? Thank you.

Okay. First, I will answer about the regulatory. Actually the NCC has reviewed all the tariff reduction already. And we -- all of the operators have presented a lot of information to them. We tried to negotiate with them. Actually we hope that it will not happen again.

Regarding your second question, our regulatory body approved the petition from the [PSMG] regarding the capital management ruling. And we will consider that and evaluate what would be the best for our procedure. Okay?

And so just to follow up on the first one. So I guess you are expecting that NCC is convinced that the competition is already intensive and no more tariff cuts are necessary particularly --?

(Multiple Speakers)

We tried to do our best to persuade them not to do it again. But we are not very confident about that.

Okay. Thank you.

The next question is Anand Ramachandran from Citi Investment Research. Please begin.

Yes, hi. My name is Anand Ramachandran from Citi, Hong Kong. Thank you for the call. I have three questions. First question is on third quarter guidance. You put out your third quarter guidance on July 14. And you have not referred to it in this presentation at all. So I'm just wondering if there's any change to that third quarter guidance given that July numbers looked pretty okay. Or you still expect EBITDA and net profit to be down quite materially? That's question number one.

Question number two, the drivers to that low third quarter guidance, if that persists, should we expect that to continue into the fourth quarter as well? Or is there a one-off here which hopefully recovers into the fourth quarter?

And my third question is on the property development update. Thank you for that. I just wanted to check, you've given us a number of about 10% of your land bank that can be redeveloped and monetized over the longer term. Is that still holding true, i.e. about 42 hectares out of the total over the longer term? Because the numbers I see here over the next five years are much lower than that. Thank you.

Regarding the third quarter guidance, our July results is -- looks in our -- our effective cost control has some impact on the margin. And we will keep our cost under control. And so now we still hang on with our current guidance.

Regarding the third quarter and fourth quarter, since the -- in the last year we recognized some compensation expenses in -- toward the end of the year. But this year we spread out evenly every month. So hopefully, by the end of the fourth quarter, if everything remain constant, and hopefully the margin will be better than last year. But it really depending on the fourth quarter revenue conditions. Thank you.

Anand, could you please repeat your question number three about property?

Yes. Out of the 410 hectares of land, how much of that do you expect to be rezone] and monetized over the longer term?

Well, let me answer this by saying that, yes, we do have this set of lands. And we used to say that about 10% is ready for development. But since last August the Company stressed that we will be a little bit more conservative in exploring the development of these lands. And we set the new direction, rental, leasing, instead of selling our land. And so that's pretty much for the previous say, tenets of our policy on land development.

But recently, because of certain opportunities arise, so we reviewed our policy. And we made it clear to you today that there will be seven pieces of land to be developed in the coming years. And potentially some rental and leasing revenue will be generated throughout these developments. And we will constantly review our situation. And if there is any new opportunities, we will certainly let you know. Yes. Thank you very much.

Thank you. If I could just follow up, what was the thinking behind reducing the mid-term targets for land monetization? I mean was there something specific regulatory coming through? Or was it just more conservatism?

And secondly on the third quarter guidance, I'm just trying to figure out what drove that third quarter EBITDA guidance to be so conservative? And clearly now things aren't turning out to be so bad. So I'm just again trying to figure out whether there was something you foresaw which did not happen?

Regarding the third quarter guidance, we kind of concerned about the economic situation. So we have to concern -- since the -- for the first two quarter, we kind of concentrated on our expenditure and cost control. So there are some expenses left for -- for being using in the third quarter and the first quarters. So that's why our third quarter guidance, the costs looks pretty high compared to the first quarter. But again, since we applied effective cost control, so hopefully the cost can be under control. Thank you.

Thank you.

Yes. And regarding to our land development policy, let me say this. This is a new area for us, and we need to accumulate experience and expertise in this aspect. So in the past two years probably the management team at that time seems to be a little bit more aggressive behind this area. So it's relative. It's not that -- something that's really materially affected our thinking in this. But it's more realistic and more try to learn from doing. And if the results prove that we are effective in developing this, then we probably should take a more aggressive approach.

Great. Thank you so much.

The next question is Tien Doe from GIC, Singapore. Please begin.

Hi. Thanks very much for the call. It's Tien from GIC. Just on your average revenue per minute on the mobile side. I suppose we've been used to seeing moderate declines of less than a percent quarter-on-quarter. In the second quarter though it looked as if those declines accelerated a little bit, down 3%. Is that cause for worry?

Second question is just on your data percentage versus your ARPUs. That ticked down moderately. It was the first time it was down for a little while. Any reason why it came down versus the first quarter?

And then the third question is, for the third quarter are you assuming a particular SAC for your mobile subscribers in your conservative third quarter guidance? Your SACs have increased again in the second quarter. Do those continue to rise in the third quarter? Thank you.

This is Fu-fu. About the question number one, you mentioned about the mobile revenue declining?

Mobile revenue per minute, Fu-fu.

Mobile revenue per minute, okay.

If you just do it based on ARPU versus minutes, it's like [3.5]. And that's down about 3%. If you exclude the data, it's about [3.12]. And that's down about 3% quarter-on-quarter. In previous quarters it's -- the declines have been a lot more moderate than that. It's been at most 1%. It's just a little higher than normal.

Okay, I will check that. I will get back to you a little bit later?

And the second question you mentioned about the data percentage?

Yes.

(Multiple Speakers)

It was not really clear from your side.

(Multiple Speakers).

Yes, the data percentage as a percentage of mobile ARPU was about 11.3% in the second quarter. It was down from 11.5% in the first quarter. And that's the first quarter where it's shown a decline for quite a while. I'm just wondering was there a particular reason why that happened.

You're talking about mobile data percentage? Is that --?

Yes, that's right.

You're not really -- we're not really clear.

Yes. Yes, data revenues as a percentage of your total mobile revenues, it declined for the first time in the second quarter for quite a while? Just wondering why that happened.

The first quarter -- the second quarter and first quarter's number is quite close you know. It's not really has declining. I don't know what data you are mentioning right now?

I mean it's pretty close, but it was a decline. And given what you said about collaborating with handset providers to increase that value added percentage, and more 3G subscribers coming onto the system, and more smartphones coming onto the system, I would have expected it just to rise, to continue to rise, rather than come off. That was an economy linked thing you think? A poor economy means people spend less on data, and that was a bigger factor than more 3G subs coming onto the system?

I'm sorry, Tien. The question is really too long to really understand that. How about that, let's get to the third question. Then I will get back to the second one, okay?

All right. Okay.

The third question, you're asking about our SAC of mobile in third quarter will increase or not because we are -- you kind of worry about our guidance for third quarter? Is that --?

Yes, that's right.

Okay. Okay, good. Tien, if you look at our data, our mobile subsidy for the first half, the number actually, if you look at the [Y1] number, it decreased about 26%, okay? So that means in the first quarter, the Y1 number is declined about 16%. But that means the second quarter, we are a little bit slower in the second quarter. But third quarter, of course, we presume the handset subsidies will be about the same level in the first quarter -- like the first quarter 2009. So it will be, of course, a little bit aggressive than the previous, second quarter. But -- I think that's it.

Okay. Thank you.

But back to your second question, I don't know, do you want to repeat a little bit briefly your --

Yes, I'm sorry. It's -- you are expecting, say by the end of the year, a resumption in the growth of that percentage, total data revenues to mobile revenues? Or you think it will stay about the same, at about 11%?

Tim, I'm really sorry because -- because of the noise in the lines, so --

Tim, maybe it's because of the acoustics. So would you please stay a little bit away from the microphone so that we will have a better voice quality from our end?

Let me try this one. I'm trying another handset now. Is that better?

Yes, we're sorry. Are you finished, Tien, or do you have another question?

No, that was it. Don't worry.

Okay, thank you. Operator, let's go on.

(Operator Instructions). The next question is Shirley Tse from UBS Hong Kong. Please begin.

Hi, thanks very much for the call. I have three questions. One is as you mentioned in the beginning of the call that you have changed -- that you are going to change to segment reporting. I was wondering if that's just on an accounting basis or operationally there will be changes to how the operations are run as well and if there could be any quantifiable benefits coming from it.

And secondly, I notice in your property development slides you were mentioning that there will be some investment costs. I was wondering what would that -- would that be the book value of these lands that you are going to develop or that could be additional costs? Because I understand your strategy was mainly to provide the land, while a property developer spent the money in terms of the development and share in the profits.

And also thirdly, going back on the guidance numbers for the third quarter, as Tien mentioned about the subsidy level. I was wondering if you can maybe give us some more color in terms of the year-on-year increase for the costs of services and also for the operating expenses. Which are the two largest contributor to that big increase so as to get a better understanding?

Okay, let me answer the first question about our redefinition of segmental reporting. This redefinition of our segment is to reflect the alliances of our service with organization mainly responsible for that service. This is the main reason and this really follows the new accounting principle been announced in April this year in Taiwan.

So in this redefinition, leased lines will be included in domestic fixed line and also International. ADSL plus fiber solutions FTTx would be classified in Domestic service and the sales of mobile and data cards would be in mobile segments. And managed data will be classified according to its source of service, maybe in domestic or international or in mobile. So this will be the results of our redefinition. So it's more towards the accountability from management's point of view.

Okay, let me answer your third question first regarding the third quarter guidance. You mentioned -- you asked about which top two items the most cost increasing. And I can identify for the third quarter cost expense increase the number one would be the maintenance and the material cost. The reason is because the last -- some of the maintenance and material costs were happened in the first two quarters but we book -- because we, after our examination period and we collected it, we have to pay the money. So those happen on the third quarter.

But the second item would be some cost of goods sold because we launch -- the iPhone 3Gs will be in August and also the netbook. So this will be the top two items. Thank you.

Also on the property question?

Well, the cost of the -- what we mentioned in the slide is half of them are the land costs, half of them are the development costs.

I'm sorry. That's for the six pieces. We actually sold to our subsidiary, okay. But for the two commercial buildings, this is mainly the build out cost okay.

So for the six pieces of land, the TWD1.5b to TWD2b estimated investment, that already excludes the land cost because you already sold it to your subsidiary.

No, because we are -- this is talking about for the whole Group because we are 100% own the Era Light property subsidiary. So we sold the land to them but actually we still have the cost of the land. So this TWD1.5b to TWD2b in total Taiwan dollars, actually it's including the land cost and the build out cost.

Okay. And just one last follow up question on the guidance. You mentioned that the cost of goods sold was coming from the netbooks and also handset costs. Is that from expected take-up on these new handsets and hence translating to the subsidy for these? Or maybe there could be some inventory that you are going to have to write off?

Can you say again, sorry?

For the increase in terms of the cost of goods sold, relating to the handsets and also netbooks, is that mainly on expectations of higher net adds in the quarter for these services? Or would that be old stock that you might have from previous shipments or devices that you might have to write off.

Basically, this is for the third quarter because we mentioned to our investors that the iPhone, this kind of model we actually -- actually give order every week. So that means we don't really have any inventory material -- the large number of inventory. So this is not really the shipment from the previous quarter or previous month.

Got it. Thanks so much.

You're welcome.

The next question is Neale Anderson of HSBC. Please begin.

Thank you. I had two queries. The first one was on broadband. It seems competition in this segment is increasing and obviously it's difficult to upgrade customers to fiber in the current economic climate. What's your view on the outlook here, particularly with regard to the pressure from cable broadband? You mentioned that on previous calls. So would it be possible to get an update on competition from cable?

Secondly, in the corporate strategy update, you mention exploring investments on the mainland. I appreciate it's early days here. But are any particular sectors you will focus on? And are there any further regulatory or government approvals you need to be in place before you can proceed with this? Thank you.

Let me answer the first question. About the -- we have made the survey to our customers. For the average one month we (technical difficulty) about our ADSL customer, about 60,000 customers. And in this 60,000 customers, 60% of them are upgraded to our fiber. So -- and 7% of them are going to the cable. And today we think the cable's competition is not so serious for us.

And on the Mainland opportunity let me say this, I classify the opportunities or relationship -- potential relationship with operators or business in Mainland into four categories.

One is the most difficult ones requiring regulatory changes or policy changes. That is the investment, equity investment in infrastructure related business. The second category is equity investment for value-added service. And the third category is for ordinary businesses, collaborations for ordinary services, telecommunications services. And fourth category of business opportunity is -- that is the other than telecom service. It's not to be classified into telecom services. Those are the potential opportunities for us.

And the current regulation in Taiwan mandates that no operator is permitted to invest, equity invest in Mainland China for infrastructure or value-added service. None of this has been permitted. So if we want to do anything in this regards, in these categories, we need policy approval.

And for the ordinary business, it's been going on for many, many years. And as you are probably aware that Mainland China is now the largest outgoing destination for our international traffic. It amounts to nearly 40%, which is quite significant. And many of the telecom services we collaborate with operators in Mainland China. It's still very good and we since the -- since early this year the interactions among the operators across the Strait is more intense and we believe with all this rather intensive interactions more services will be offered across the Strait.

A couple of examples. One is the roaming for prepaid customers because in Mainland China, majority of the customers are prepaid. So if they are able to bring their prepaid -- telephone service and mobile service and come to Taiwan and it's international roaming service offer, then it's good, yes. So this is one category. And there's been of course detailed discussion among operators.

And second category is if the more usage of value-added service from each operator's offering. And let me explain what is this. For example, if our customer here in Taiwan, when he travel to Mainland China, he can make use of service available in Mainland China, the value-added service in mobile, for example. Similarly if the visitors coming from Mainland to Taiwan and they are able to make use of our value-added service it's also good. Some kind of arrangement, business arrangement is required and we would like to see this happening.

So we have no specific numbers to tell you at this moment. But the direction is -- we believe we are moving towards the right direction. And when it materialize then we will book those in our book.

Great. Thank you very much.

The next question is Kathy Chen from Goldman Sachs. Please begin.

Hi, thank you for the call. I have three questions. The first one is a follow up on the comments regarding the cost outlook for the second half. Can you share with us in your third quarter guidance what are you assuming for the cost of goods sold increase year-on-year?

And then in terms of the earlier comment that for the fourth quarter we may not see some of the year-end compensation expenses like we saw in the past, could you clarify in terms of seasonality will we still see potentially some increased costs for some of the other cost items in the fourth quarter? That's the first question.

The second question is related to the property development. Could I clarify, for the amount that's been rezoned, I thought that recently that has been increased from 10% to 15% of your land bank. Can you clarify what that level is? And then related to the seven plots of land you've highlighted for the next five years, will that also be injected into LEDC?

And then the last question is just on the CapEx. You mentioned that CapEx will stay at 15% of revenues or below. So can I just check that that equates to roughly about TWD30b? Thanks.

Yes, regarding the first question, for the fourth quarter, as I mentioned earlier, since we still have some costs already booked in the previous three quarters evenly, so the margin [generally] is a bit on revenue side if it's not deteriorating, compared to last year, then the margin should be better, but really depending on the fourth quarter economic situation and our revenue and service.

And so that's my comment on the fourth quarter. So it's okay with you? You need a further comment?

Yes. But basically, we won't see much seasonality in costs in the fourth quarter this year as we've seen historically. Is that right?

Probably not as significant as last year. Because as I mentioned, normally in the past in the fourth quarter we especially on December we have a sudden drop in the profit because the costs they are booked in that period of time. But this year the situation will be different because some of the costs are already booked on the previous three quarters.

Right. But should the seasonality return to prior to '08 levels? Because I think '08's impact is because of the employee bonus adjustments, right?

The seasonality regarding the -- the reason we have the, on the fourth quarter the profit margin is -- the EBITDA margin is lower is primarily because of the expense. But as I mentioned some of the expenses is already spread out on the previous three quarters.

Okay, thanks.

Kathy, about your -- regarding your second question, you mentioned about that 10 -- 10% to 15%. Could you repeat it?

Yes, basically I think earlier Chairman Lu mentioned that the amount that can be redeveloped is 10%. But I thought recently you were able to get more land rezoned, so that the total amount that's now been rezoned for non-telecom usage has gone up to 15%?

No. The 15% probably is related to the rezoning of our land, the classification of usability of land. Maybe Fu-fu can offer more clarity on this.

Kathy, yes, I think we -- for the past several years, we have rezoned some of our land okay, rezoned to -- most of it is rezoned to telecom use only. So that means we can actually lease those buildings or those lands for the (inaudible) station for rental revenue. I think that's the major purpose of the rezoning.

Of course probably very minimal of the rezoned land they actually rezoned to residential and commercial. So your question is the -- I think you mentioned about that seven pieces land. You mentioned also our [100% owned] property subsidiary.

Right.

Can you --

Yes, sorry. It was actually a two part question. But basically for the rezoning, just to clarify, 15% has been rezoned, right?

Of course we -- for this -- about 409 hectares of land, 10 of them actually already don't have to be rezoned. They're already commercial and residential. I think we mentioned this to investors probably two years ago. But of course, aside -- apart from this we actually proposed to the local government in Taiwan, we tried to rezone some other lands. That has been -- this process has been ongoing for about two years, okay. So some of them actually rezoned successfully.

So in total currently probably we have about 15% of land, it's actually -- I cannot say it's available to develop. It's already rezoned to the commercial and residential. I think that's it.

Yes, that's what I was confirming. Great. Sorry and the second part of the property question, was just clarifying for slide 18 on the right side, where you talk about the term targets over the next five years. For those seven pieces, the new seven pieces, is that also injected into LEDC or is this more commercial redevelopment for rental income that will be done at the Chunghwa parent company?

You see this seven pieces remain -- I think primarily, preliminary thinking, we will hold in the mother company. Probably we will not transfer to the -- that property subsidiary.

Right, okay. Then CapEx?

The CapEx level as mentioned by Dr. Shieh is up to 15% of our sales. And for this year we -- since only about one-third of the projected CapEx to be spent in the first half, so the remaining second half of this year, the total CapEx probably will be slightly below TWD30b.

Okay, thanks. And then, sorry, the other question that wasn't answered was related to third quarter cost of goods sold increase expected year-on-year?

Regarding the third quarter guidance, so far as I mentioned we will focus on effective cost control. But we -- now we just remain on our guidance, at status quo.

Can you share the amount that you assume in the guidance though for the cost of goods sold trend?

Kathy, you are mentioning about the third quarter or the year?

Third quarter. In the third quarter guidance what have you assumed for cost of goods sold in terms of year-on-year increase?

Cost of goods sold?

Yes.

Yes, the cost of goods sold for the third quarter is -- compared to last year actually is not much difference. If compared to first two quarters, it's increased as I mentioned because the -- some of the costs -- in the first two quarter because of the economic situation we are all concerned about the market condition. But now the market is becoming more stabilized, so on the third quarter, even on the fourth quarter we have some strategic expense like some smartphone marketing costs. Really, it's hard to break up the first two quarters. But compared to last year, the total cost of goods sold is not much different.

Okay, thank you.

Due to the time limit, we will open the last and only one question from Dee Senaratne from CLSA. Please begin.

Good evening, guys. Thanks very much for the call. I just had three questions. Just the first one on broadband ARPU. If you look at it on -- both on the half and on the quarter, the ARPU is declining just slightly there. But I guess -- I was just wondering why that's happening because as you were saying you're trying to not really grow the customer subscriber base but grow -- migrate customers on to fiber obviously at a higher value. I'm just wondering why that ARPU isn't showing up in the numbers.

The second thing, a question just on the fixed line. Obviously the Fixed-line continues to decline and in your presentation you talked about some of the threats there such as VoIP and fixed to mobile substitution etc. I'm just wondering when do you see an inflexion point in that business and are you looking at any specific measures to promote further fixed line stability?

And then the final one, just on CapEx. Over the previous quarters, [14%] as a percentage of sales and in the last two it was down 11% and now you're guiding over the next five years around 15% of sales. I'm just wondering why that's increasing. What are the areas of CapEx that you're focusing on? Is it in the fixed line business or on the mobile side? Just a bit of color there on why that's picking up again. Thank you very much.

About the broadband ARPU, actually the broadband ARPU comes into two categories. One is from FTTx and the other is ADSL. And due to the three years tariff reduction by the regulators, so actually the reduction rate is over 18% and plus we have given our senior customers some discounts. So the ADSL ARPU goes down very quickly. So that's one of the reasons.

The second is because the Taiwan society is going to the [N type], so some of the customers they are subscribing -- some of the new entering customers, they subscribe the low speed ADSL services. So the ARPU goes down. So totally you are seeing the broadband blended ARPU is declining a little bit. Thank you.

Regarding to the CapEx the 15% guideline is about the -- let me say this. On our presentation for the year 2006/2007, the percentage -- 2006 the CapEx to sales ratio is about 15% and 2007 it decreased to about 12.7%. And last year, year 2008 it went back to 14.9%. So this is pretty much close to our reference level 15%.

And for this year, the first half is only 10.6% and this is pretty much in line with what we had last year in the first half. In the first half of '08, the CapEx to sales ratio is 11.2%. So this is a seasonal reason because CapEx requires -- CapEx spending we need to write our specifications and then go into procurement procedures, the systems or equipments deliver and then install and then inspect it, examine and certain tests. So there is a procedure to go through.

So normally, majority of the CapEx occurs during the second half, so normally two-thirds in the second half. So this 15% is not a big difference from what we set forth before for the previous years.

And the areas of investment has already been mentioned in the presentation. It's on mobile and also on fixed line, especially on fiber solutions to customers. The fiber loop, this will consume most of the CapEx.

Of course the CapEx spending should reflect business opportunities. So we will control our CapEx very carefully and hope our investment will generate return to our shareholders.

Okay, great. Thanks, guys.

There are no further questions. I will turn it back over to Chairman Lu.

Okay, thank you very much for joining our conference call and thank you very much for your valuable questions and your continued support to Chunghwa Telecom. So good night from Taipei. Bye-bye.

Thank you, Chairman Lu. Thank you for your participation in Chunghwa Telecom conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the In Focus section. You may now disconnect. Goodbye.