Chunghwa Telecom Co Ltd (CHT) 2010 Q2 法說會逐字稿

Good evening ladies and gentlemen. Welcome to the Chunghwa Telecom conference call for the Company's first half 2010 operating results. During the presentation all lines will be in listening only mode. When the briefing is finished, directions for submitting your questions will be given at the Q&A session. For your information, this conference call is 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 Investor Relations section.

Now I'd like to turn the call over to Fu-fu Shen, the Director of Investor Relations. Thank you. Mrs. Shen, please go ahead.

Thank you. This is Fu-fu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our first half 2010 results conference call.

Joining me on the call today are Dr. Lu, Chairman and CEO; Mr. Chang, President and Dr. Yeh, CFO. For today's agenda, management will discuss business, operational and financial highlights of the first half of 2010. This will be followed by Q&A.

Before we continue, please note our Safe Harbor statement on the slide first.

Now I would like to turn the call over to Chairman Lu.

Thank you, Fu-fu. Hello everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first half 2010 earnings results conference call.

I'm pleased to report that we have concluded the first half of 2010 with another quarter of solid results. Despite another mandated tariff reduction from the NCC, which was effective as of April 1 of this year, we have delivered a solid performance for the second quarter.

The results were due to continuing economic recovery and our successful marketing efforts.

Increase in consolidated revenue for the second quarter of 2010 was mainly driven by an increase in handset sales, mobile VAS revenue and the Internet service revenue. Our prudent cost management initiatives have delivered a stable operating income with net income growth due to a reduction in our income tax rate from 25% to 17% which started in 2010.

Moving on to slide number three, our commitment to our shareholders continues as you can see on this slide, which shows our cash return over the last four years. We maintained a high dividend payout ratio and intend to continue this policy.

Cash dividends for 2009 were approximately TWD39.4b, which will be paid out in September.

In addition, the fourth round capital reduction has been approved by the Board and by our shareholders at the AGM. We are scheduling for it which will reduce Chunghwa's existing paid-in capital by 20%. Capital reduction payment of around TWD19.4b is expected to take place in the first quarter of 2011.

Now I will hand over to President Chang for the business overview.

Thank you, Chairman Lu. Now let me take you through our business performance.

Slide five shows our Broadband service data results. At the end of the second quarter this year, Chunghwa had 4.3m Broadband subscribers, accounting for an 82.2% share of the market, although our total Broadband subscriber number has remained relatively flat.

Our initiatives to encourage FTTx migration have yielded solid results, with FTTx subscribers, as a percentage of the total Broadband subscribers, increasing from 31.2% to 42.8% year over year. In the second quarter this year, the FTTx revenue has already accounted for 57.5% of the total Broadband access revenue.

Internet revenue for the first half increased year over year, primarily because of the additional Broadband subscribers and the migration of customers from ADSL to FTTx solutions.

Please refer to slide six. Recently, we have seen a boosting MOD subscriber growth. For the second quarter this year, new subscriptions represented 4% of the sequential growth. The total number of subscribers now reached more than 720,000. In the first half of 2010, a number of initiatives significantly drove the growth of our MOD business.

First up was the launch of our Family Package with enriched content. Second, the enhancement of our user interface. Third, the event-based branding building effect of the World Cup.

We are strengthening our MOD strategy in terms of content, marketing and interactivity and we will continue to encourage additional popular HD channels to better cater to our customers' preferences and enrich their experiences.

By the end of this year, we aspire to have 15 HD channels in the 114 SD node.

The increase in fiber coverage facilitated our capability to offer HD services to more customers. We will continue offering additional HD channels and programs to meet customers' needs. Our target is to have 900,000 MOD subscribers by year end and expect the related revenue to increase by 25% year over year for 2010.

Please turn to slide seven. We continue to be the leading mobile operator with the lowest churn rate and solid year over year subscriber growth of 4.5%, bringing the total number of our subscriber to 9.4m as at the end of June.

3G subscribers, as a percentage of the total, has continued to increase. First half of this year, Mobile VAS revenue increased by 27.6% year over year and is now 14.4% of total Mobile revenue.

Mobile Internet demonstrated the highest year over year growth of 78%.

SMS showed a solid year over year growth rate of 6.9% and the remainder largely is contributed to VAS revenue.

We expect the growth of Mobile VAS to continue in the future, as we will focus on executing our VAS strategy to enhance our user experiences, create value-added service and customize and integrate the service over a quality network.

Slide eight shows the success of our Mobile strategies. Our smartphone, which leverage a variety of applications, are increasingly penetrating the premium customer segment. Smartphone accounted for 17% of total handset offered in the first half and we expect that to reach 20% by the end of this year. As of June 30, Mobile Internet subscribers, including mPro and data card users also grew to 558,000, a 133% increase compared to one year ago.

On the ARPU side, you can see the smartphone ARPU is 122% higher than the blended ARPU.

In addition to the devices, we have been focusing on enriching content of our customer value-added services. These various services include the information services, application services and so on. In May we launched the Hami F, which supports the Android platform. As of now, there are about 370 applications over Hami F. We believe our efforts to enhance content will further expand our customer base and solidify our leading market position.

Slide nine. I would like to share with you our new business initiatives to drive future growth. First, we initiated the convergence services to meet growing customer demand. We are integrating internal resources to combine the cross-platform service over our MOD, Mobile and Hami platforms. Recently, we launched our hifree music video service and protocol programs over the MOD and Hami platforms. Single sign on over the three platforms will be available in the fourth quarter of this year.

To support this development we continue to expand our fiber customer base to facilitate the promotion of digital convergence services.

Second, we focus on our corporate ICT business, including services such as iEN, ITS, Information Security, PBX, call center and IDC as well as the Internet of Things.

Third, we developed a cloud computing service. We are building the largest cloud computing data center in Taiwan in anticipation of the growing need. We are offering services via public cloud to customers such as SMEs and the individuals and via private cloud to customers that include enterprise and government. With our experiences and leading market position and the continued investment in technology, Chunghwa is well positioned to further solidify its leading position as an information and communications service provider.

As shown on slide 10, overseas development is another future growth initiative for Chunghwa. South East Asia and China are two major areas we are focusing in. Our joint venture with Viettel to establish the largest IDC company in Vietnam marks our first overseas endeavor. Duplicating our experiences in call center service, we also initiated a joint venture, Certech in Xiamen in China to capture the growing local business ICT needs.

Moreover, we will establish wholly-owned subsidiaries in China and Vietnam. We expect these two subsidiaries to function as ICT related solution providers, leveraging our ICT competence.

In order to expand our international fixed services to overseas market, we established subsidiaries in the United States, Hong Kong, Singapore and Japan. Through these four subsidiaries we are capable to -- of providing quality and competitive service including international private leased lines, IP-VPN, IP transit, voice and data wholesale services as well as type I and type II services to multi-national corporate customers.

With that I would like to turn the call over to Dr. Yeh for a review of our financial results. Thank you.

Thank you President Chang and a good day everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 12.

Slide 12 shows our income statement on a consolidated basis and provides a comparison on a year over year basis.

Total revenue for the second quarter of this year increased 3.3% to TWD49.7b. Although NCC tariff reduction became effective on April 1 this year, the Company made its best effort to maintain its growth pattern.

I will review the revenue by business segment later.

Operating costs and expenses grew 4.9% to TWD34.8b.

Income from operations for the second quarter of this year was flat at TWD14.9b.

Net income for the second quarter this year grew by 12.7% to TWD12.9b, reflecting the income tax rate reduction from 25% to 17%.

EBITDA for the second quarter this year increased 2.3% to TWD23.5b, mainly as a result of the mandated NCC tariff reduction and the changing cost structure.

Slide 13 shows our revenue for each business segment for the second quarter this year.

In the Domestic Fixed Line business, local revenues decreased by 2.2% year over year, mainly due to the Mobile and the VoIP substitution.

The 12.6% decline in DLD revenue also was due to the Mobile and the VoIP substitution and the interconnection fee adjustment at the end of 2009.

Broadband access revenue, including ADSL and FTTx, increased by 1.9% year over year. Although ADSL access revenue decreased as more ADSL subscribers migrated to fiber solutions, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 6.5% year over year, mainly due to the growth in handset sales and the Mobile VAS revenue related to our smartphone promotion.

Internet revenue increased by 7%, mainly attributable to Internet service growth, which was driven by the increase in Broadband subscribers and the migration of ADSL subscriber to fiber solutions.

International Fixed Line revenues decreased by 2.3% mainly due to VoIP substitution and the market competition that was partially offset by growth in leased line revenue.

Slide 14 shows the breakdown of operating costs and expense. The increase of operating costs and the expense was due to the increased cost of handset sales and the performance based bonus accrual that is related to the net income growth. The remainder of the costs and the expenses decreased as a whole mainly due to the decrease in depreciation expense.

As shown on slide 15, for the second quarter this year, cash flow from operating activity was TWD17.3b.

Cash and cash equivalents at the end of the second quarter of this year amounted to TWD92.8b, showing a strong cash position.

Slide 16 shows our parent company guidance for the third quarter of this year. Compared to the same period last year, third quarter this year revenue is expected to increase 0.3% to TWD46.4b.

Operating cost and expense is expected to remain flat. We expect the cost of ICT service and the handset sales will increase but depreciation expense would decrease.

Income from operation is expected to increase by 1.4% to TWD14b.

Net income is expected to increase by 8.5% to TWD11.9b year over year, partly reflecting the income tax rate reduction from 25% to 17%.

EBITDA is anticipated to decrease 1.1% to TWD22.4b, mainly as a result of the mandated NCC tariff reduction and the changing cost structure.

That's it for our financial overview. I will now hand over to Dr. Lu for our management highlights.

Thank you, Dr. Yeh. In summary, Chunghwa remains Taiwan's leading domestic player. Our ability to provide integrated telecom services continues to strengthen as we quickly grow Mobile VAS and IPTV services. At the same time we are maintaining our focus on cost control in order to ensure operational efficiency. We are committed to a sustainable dividend payout, a strong balance sheet and prudent capital management.

Innovative service offerings, including ICT services and leading edge technology, position us to capitalize on growth opportunities at home and abroad.

That's all of our presentation. I would now like to open up to questions.

Thank you, ladies and gentlemen. We will now begin our question and answer session. (Operator Instructions).

Our first question is [Jason Ling] from UBS. Please go ahead.

Hi. Thank you for the opportunity to ask a question. Your Mobile revenue growth has been stronger than your competitors and your net adds have been stronger as well. Could you just shed some light on why that is so, in your opinion?

Let me answer it this way. I think the quality is number one, because we have a very good infrastructure for the total Mobile network.

Second, we have some value-added services and it's very attractive for our customers.

The third one I think we have introduced more very attractive handset such as the iPhone and the Android handset. Thank you.

Let me add that it's all contributed from our customer care. We care our customers and this all spread out and we have positive number portability in our subscribers. That all add up to revenue growth and net adds.

Thank you very much.

Our next question is [Li Ping Hong] from Nomura HK. Please go ahead.

Thank you, management. So I have basically three questions. So the first question is about the page five. We see that the Broadband ARPU is declining second quarter comparing to the first quarter. And could you elaborate what's the reason between this -- behind it about this ARPU decline.

I think the reason is the NCC reduction -- the price reduction. And it will continue two or three years.

It's not because of the rising competition; it's just the mandatory tariff cuts from the second quarter of this year?

The mandatory reduction as we say from the April 1.

Okay.

The second question is about this iPhone 4. Do you have any guidance about what is the impact of the sales of iPhone 4 in Taiwan on your EBIT margins or because we already see -- the iPhone 3 already sold quite a long time, it has been quite stable. What's your view?

Hello? Can you hear me?

I think the way we sell iPhone 4 will be similar we did for our iPhone 3. So basically, the impact will be similar as has happened before.

So the EBIT margin will be already stabilized or you will see the net adds from these iPhones, iPhones subscriber will be quite stable as per this, or you are seeing more acceleration of this? I mean this new subscriber which -- maybe it's quite difficult (inaudible - multiple speakers).

(Inaudible - multiple speakers). If we acquire Mobile subscriber from the, subsidy, the EBITDA most likely suffer. And also another factor of the decline EBITDA is the change in cost structure. The depreciation expense is lower year by year in recent years. And it would continue do that way. So we expect EBITDA margin would still slightly lower year by year.

Okay, thank you. Okay, the last question, it's your page 21, so about this 60 Mobile co-pricing mechanism. So can you elaborate some more about what is the impact in long-term on your -- is it positive particularly to Chunghwa, or what particularly is -- can you see it's a positive regulation change to the Company?

Okay, in the long-term I think there are two aspects. When we get our pricing right from the local call and I think we can take advantage of these pricing issue, are to get -- put into our marketing, our campaign and so on.

And the -- however, the immediate impact of this in the next year actually will lower our net income next year. That is because we will lose some revenue for the Mobile side. And on the other hand, we will increase our income for our local side.

But, however, as you can see in the slide, there is a transition fee. So the transition fee would decrease. It will be TWD1.956 in 2011, and it will phase out in 2017.

Okay, basically in the first year we would suffer somewhat because of these transition fees. But after two to three years our -- the impact would come into positive. So in the long run, it will be positive for us. But in the short run, we will suffer.

Okay, thank you.

Thank you. Our next question is from [Ravi] (inaudible) from Citi Hong Kong. Please go ahead.

Good evening, gentlemen. Thank you for the opportunity to ask a question. My question relates to slide eight when you talk about 17% of your total handsets being smartphones expected to reach 20%. I was wondering if your definition of smartphone includes Symbian and other operating systems, or is it predominantly limited to Apple, OS and Android?

And the follow-on from that is what kind of split do you see in terms of OS between those smartphone subs?

In Taiwan I think the most popular OS is the iPhone and the Android. And Symbian is only from the Nokia side, but it's not so popular here. So what we see here is totally including Symbian, OS and Android, also.

Thank you very much.

Our next question is from [Dem Tree] from PGN. Please go ahead.

Hi. Could you share your thoughts on the sustainability of the capital management initiatives that you introduced here, given your cash position and future CapEx needs?

We will review our capital management policy year by year. So we will wait to see what happens in the next few years.

Right, but as it pertains to next year, do you see any big expenses in the horizon that would cause you to change current policy?

Well, we have a policy to manage our cash. And the policy is to spend on our core business in terms of CapEx. And then if there is any M&A opportunities we probably will spend, invest in this area. And if there are not any changes, or no opportunities on this side, then we will consider whether we should return to our shareholders. This has been a consistent policy over time.

So as Dr. Shu just mentioned, we will review this from time to time to see if appropriate to take any action. We'll wait and see. And this subject is subject to Board's approval so and also AGM's approval, so we will wait until early spring of next year 2011.

Okay, all right. Thank you.

(Operator Instructions). Our next question is Li Ping Hong from Nomura HK. Please go ahead.

Okay, thank you management. Two more questions. Sorry for the--. So one question is about Mobile networks road map in your last slide 23. You're expecting a lot of especial European operators to launch -- not launch but develop their LTE network.

We also see some news that you are also doing some pilot testing around this LTE network. What's your current view? Or do you have any, let's say timeframe when you are planning -- or detailed timeframe when you are planning to migrate and launch this LTE stuff?

Okay, regarding the introduction of LTE in Taiwan, let me tell you this. The spectrum required for LTE is to be finalized. And as it is the government is still working on this issue, okay. So we have to wait until the spectrum is allocated and firm.

And then NCC probably needs to consider how to auction this or to issue license for operators. We will play according to the rule set by NCC. So I believe this is our belief that it's going to take some years at least for all this to be ready. And Chunghwa Telecom, definitely we will participate in securing our own such license. And enter into LTH era in Taiwan, yes.

Another question is about your overseas business development, and quite a lot of I think some market is expecting you can do more business opportunities in China. So what's your current Company strategy to -- about the overseas development? So which area you think you can leverage your core competence? Chunghwa's revenues expectations three years or five years?

Well our strategy going abroad is this. First we like to follow our customers. There are many of our customers at home now going abroad. We would like to pursue opportunities first with these customers.

And, of course, some product and solutions is good partners are vital to develop pockets in overseas. And with respect to China opportunities we would like to start with crossed-on cities and with some of the products we have listed on slide number 10.

We believe we have an opportunity to leverage our competence in some of the ICT and VAS value-added service products. And we believe we -- or we set a target for ourselves that we will be profitable in three years.

What is scale of the business you are expecting in these three years?

Well you know depending on the phase of penetrating into the market, and I believe it takes a while to establish our presence in that market. So I would rather not give you any specific numbers at this moment. Maybe as we becoming -- we are more ready then we will share with you more light on this.

Okay, thank you.

Okay, thanks.

(Operator Instructions). Our next question is from [Regina Lu] from CLSA. Please go ahead.

I'm wondering if you can give some colors on your strategy on smartphone subsidies. I think you mentioned last year that smartphone users generate twice more ARPU than regular users.

But I think the landscape has changed for carriers in Taiwan as the other two carriers all have iPhone 4 and they have android models now. So in terms of total amount of smartphone subsidy do you see that amount to increase in the next couple of quarters?

Just to the handset, except that the iPhone will -- actually we have a long relationship with local handset manufacturers such as HTC. HTC now it is very famous for the android phones.

So we have very good relationships. And we have very good cooperation with them, so we will introduce some new handsets from there -- from them. Expect that we also have coverage with other vendors such as Samsung and so if the smartphone is good for our customers we will introduce. Thank you.

Okay. I just have a follow up on that. I think there is a trend in the US that a lot of carriers are starting to provide SIM only service. Meaning that they don't provide subsidy any more. So basically users just renew their contract without getting a new phone. Do you think that's a direction that you will eventually get in to?

Well it really depends on the competitive environment okay. And if in -- by any means it's happened here. We would love to see no on any phones. But it really depends on the market.

Okay. But for now you are still looking to continue your subsidy in smartphones?

If the market requires some kind of management on this, we definitely have to go with it yes.

Okay, thank you.

Yes thank you.

Our next question is Joseph Quinn from Macquarie Securities. Please go ahead.

Thanks guys for the conference call. Just got two quick questions. The first one is relating to IFRS and the property that Chunghwa obviously holds. Have management come to any decision in terms of how they are going to deal with this property asset then the valuation of it?

And the second question is on the data plans. It is a trend we are seeing more so in Europe and the US that unlimited data plans are being -- or sorry tiered data plans are being preferred over unlimited data plans. I'm just wondering what management's views is on that sort of package being introduced more in Taiwan. Thank you.

We haven't made any decision about how to value the real estate. However, with the international companies, we found generally if the asset is for operational use, Company continues to use historical cost basis. I think that is the great difference for us.

Okay. So roughly in terms of your current property, your holding do you have an approximation of how much is being allocated for operational use and how much is dormant land?

Most of them we acquire is for operational use, so the -- yes most of them is for operational use.

Okay.

As to the data plan, actually we already provided several data plans such as the NPL 150, NPL-45, NPL-950. Only the NPL-950 are limited use of data. So -- and for the traffic of concern, even the limited user customer didn't occupy the traffic not so much. Only less than 2% of the data card users, they occupied a lot of traffic. So I think unlimited data plans today is not something for us.

We end up for the unlimited data plans we offer these days, we are considering to adopt tier pricing if possible. The Company has already -- has submitted a proposal to NCC for approval on this. And NCC are not ready to accept our offering. So we have to talk to them again to see if tiered pricing is applicable here in Taiwan.

Can I ask, has the NCC given any more clarification on why they have an issue against tier pricing?

You know NCC needs -- we will need to have more communication with them to convince them that this is the right thing to do, because in the past we believe NCC is more customer oriented and their thinking is in current pause customer benefit. That's part of the reason. And so we believe we need to do more communication with them.

And sorry, just to follow up on that. I do understand that you do have tier packages out there, but do you have a rough estimate on the percentage of customers that go for unlimited packages?

On some of the brief surveys I've done in many of the different stores, among colleagues etc, I do find that most people who are signing up for smartphone packages do also go for unlimited data packages.

We do not give out detailed numbers like this. So please understand, yes. Thank you.

That's okay. Sorry and just one other question. In your first quarter results on your operational analysis sheet you state at that time release a handset subsidy number of 4,336. I'm just wondering why you haven't released it for second quarter. Has the trend in second quarter been up or down in terms of handset subsidies?

The trend has been coming down for the second quarter as compared to the first quarter. And I believe this is a good trend that developed.

Is there any particular reason for that? Is that the interjection of the iPhone by the other two carriers or is there another reason for that?

Well the main reason for this is, as you just pointed out, is we have very good sale of iPhones during the first quarter yes.

Okay. Alright thank you.

Yes, thank you.

(Operator Instructions). Our next question is from Ken Goh from GIC Singapore. Please go ahead.

Hi Dr. Lu. Thank you very much for the conference call. Just one question on the usage, the data usage of your mobile subscribers. You've given us the differences in ARPU between 3G and smartphone subscribers, but would you be able to tell us what the difference in data usage is please?

I'm sorry, could you repeat the question?

Yes. You've given us the ARPU differences between your blended mobile subscribers and the 3G and the smartphone. I'm just wondering what the data usage differences are between 3G and smartphone subscribers and your average usage.

I believe your question is about the composite how we calculate these numbers. The blended number is for all of our Mobile customers.

No, Dr. Lu, I'm just wondering about what's the data usage in megabits per month for your 3G subscribers and for your smartphone subscribers. For your smartphone subs, is it about, I don't know, 400 megabits, 500 megabits a month?

Depending -- this is -- the smartphone people use a lot of smartphone to get into the Internet, so data usage is certainly high through smartphone, especially for those who make a lot of use of Mobile Internet yes. And the other simpler version of handsets, the data usage tends to be low. And I would like to have President Chang to add more specific information here.

The average smartphone data usage is about 1G. Data cards are higher.

And what would your average 3G subscriber be using versus the 1G for smartphone subs?

I mean it's for the data users.

Yes.

Smartphone we have up -- they have to subscribe to our special packages such as I just mentioned NPL-150, NPL-450. That kind of customer usage averages about 1G.

Okay. Alright, thank you.

(Operator Instructions).

If no more questions I would like to say thank you all for joining our conference call for the first half of 2010. Thank you very much. Good night from Taipei.

Thank you Mr. Chairman Lu. Thank you for your participation in Chunghwa's Teleconference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the in focus section. You may disconnect now. Goodbye.