Chunghwa Telecom Co Ltd (CHT) 2011 Q4 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom teleconference call for the Company's 2011 operating results. (Operator Instructions). For your information, this conference call is now being broadcasted 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 Fufu Shen, the Director of Investor Relations. Thank you. Ms. Shen, please go ahead.

Thank you. This is FuFu Shen, Investor Relations Director for Chunghwa Telecom. Welcome to our full-year 2011 results conference call. Joining me on the call today are Dr. Lu, Chairman and CEO; Mr. Chang, President; and Dr. Yeh, CFO. During today's call, management will discuss business, operational and financial highlights. This will be followed by Q&A.

Before we continue, please note our Safe Harbor Statement on slide two. Now I would like to turn the call over to Chairman Lu, please.

Thank you, FuFu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our full-year 2011 earnings results conference call.

On slide number three our total consolidated revenue for the full year 2011 amounted to TWD217.5b. This increase is mainly due to higher fixed-line revenue resulting from the pricing rights shift for fixed to mobile calls as well as the increase in mobile VAS revenue and handset sales. Higher construction revenue from our property development subsidiary also contributed to the revenue growth.

Moving on to slide number four, we have maintained a 90% payout ratio for the past few years and this expected to continue. On January 4, the amended Company Act was announced. In accordance with the amendment, a company that is profitable is allowed to directly distribute cash to shareholders from its capital surplus or legal reserve.

Our capital surplus and legal reserve at the end of 2011 totaled TWD169.5b and TWD66.1b respectively. As we understand the importance of stable dividends to some investors, the management team will decide whether to take advantage of this amendment and distribute this special dividend based on operational results. Relevant proposals require Board and AGM approval prior to implementation.

We recently participated in China Airlines' secondary offering and signed an MOU with the airline to form a strategic alliance. The Board approved the project on January 16 after an extensive discussion by Board members, which included the effectiveness of this strategic alliance, the execution of cooperation and whether the possible risks could be acceptable. Prior to receiving Board approval, the issue was also discussed by the Board's Strategic Committee back in August 2011.

Now I would like to hand over to President Chang to present our business overview.

Thank you Dr. Lu. In order to make a proper comparison with the peers we would like to normalize the effect of pricing rise shift for fixed to mobile calls. After normalization the pro-forma mobile service revenue presented a growth rate of 3.9%, the highest among the three major operators. Furthermore our market share of mobile service revenue remained flat, evidenced in our success at maintaining our market prominence.

On slide seven we can see mobile VAS revenue growth rate after normalizing the effect of the temporary price discount, demonstrating our success at maintaining our growth momentum and competitiveness. This temporary discount which involves subscribers whose mobile data usage per month is less than or equal than 1 gigabit being given a 20% discount will last until December this year.

Mobile data network quality remains our focus. We would like to ensure that we maintain our leading edge in terms of network quality. Our construction and the capacity expansion of base station is on track. By the end of this year we plan to have 4,000 HSPA Plus base stations to provide more capacity in hotspots in order to effectively relieve traffic congestion. In addition we are continuing to install WiFi APs to offload the traffic from mobile networks and we expect to accumulate 30,000 public WiFi APs by the end of this year.

Moving to slide eight, let's turn to mobile business. As mobile competition is becoming increasingly fierce we plan to supplement the existing strategy by offering popular high-end smartphones as well as mid- and low-tier models in response to customer demand and to provide attractive value-added service. Please see the next slide for the various models we offer.

On slide nine, due to the continued popularity of smartphones, mobile Internet and mobile data usage continued to increase. At the end of last year we had 1.5m mobile Internet subscribers, representing strong growth momentum of 85.4% year over year. We plan to add 700,000 mobile Internet subscribers by the end of this year, representing 46.6% year-over-year growth. Our smartphone penetration rate has reached 23% in terms of our postpaid customer base at the end of 2011.

Slide 10 shows the results of our Broadband business. Migrating broadband customers to higher speed has been our major strategy for the past few years. As telecom is a regulated industry, we reduced our fiber tariff in June last year in order to satisfy customer demand for lower broadband tariffs and minimizing regulator interventions. This brought in 400,000 fiber subscribers, including those upgraded from our ADSL services. We anticipate that the relevant revenue will return to the level before the tariff reduction by the second quarter of this year due to continued revenue growth momentum.

As part of a separate initiative we offered a 20% discount for ADSL subscribers at the start of this year in order to expand our subscriber base. Overall broadband revenue which had been affected due to the two tariff reductions that I mentioned should recover to second-quarter 2011 levels by the second quarter of 2013.

We are now anticipating that this move will bring in non-broadband subscribers and help us acquire customers from cable operators as well as enhance customer loyalty. We expect subscriber net add for this year to be 500,000. As customers are our most important resources, we believe more customers will utilize our broadband value-added service due to this initiative.

Moving on to slide 11, MOD subscriber numbers and the revenue have continued to increase. We expected to acquire additional 500,000 subscribers this year which will directly contribute to revenue. We have made progress in terms of acquiring quality content. For example, we have acquired new media broadcasting rights for the 2012 Olympics for our MOD, mobile and HiNet platforms. And recently, so-called Linsanity has boosted our household viewing rate many of our MODs subscribers wish to watch Lin's games via HD-quality broadcasting.

Owing to the declining trend of the traditional market and regulation dynamics we are focusing on paving new avenues for revenue streams.

On slide 12 in addition to our traditional telecom service we have expanded our corporate business scope and the focus on ICT business to include government projects. Our corporate ICT business revenue amounted to TWD6.2b for fiscal year 2011, representing a year-over-year increase of 29.8%. Moving forward we expect this service revenue to continue to grow in 2012.

We will also continue strengthening our cloud computing infrastructure and closely cooperate with relevant partners to develop innovative cloud applications, including personal, storage, enterprise, tourism, distribution and healthcare cloud services to further expand our revenue streams in the mid term. In the first half of this year we plan to offer personal, storage, and enterprise cloud services.

Moving to slide 13. In August 2010 we began to study business opportunities for tourism cloud services as the government announced its decision to focus on development of tourism industry. We started a dialogue with the relevant parties of the industry in March 2011 regarding the offering of ICT services on tourism cloud platforms. Moreover, we established Transportation and Tourism service department in December last year to develop relevant cloud platform.

China Airlines, the leading airline company in Taiwan, has a significant influence on the tourism value chain, with more than 2,000 domestic travel agencies, as well as the availability of China Airlines service channels in 25 major cities in Mainland China. The formation of the alliance will facilitate the development of new business.

With our participation in China Airlines' secondary offering earlier this year, we expect to leverage the airline's expertise and operational experience within the tourism and transportation industries to develop relevant ICT services, including intelligent tourism and the transportation cloud services. We plan to offer tourism cloud services to serve the value chain of the tourism industry and we expect China Airlines to help by introducing and acquiring parties along the chain as well as their customers.

A special committee has been set up to advance the project and the Board will review it periodically to ensure the effectiveness. In addition, we will periodically report on the progress of the cooperation to all of our investors. Please refer to slide 14 for the major items of the MOU we signed with China Airlines.

There are three aspects of cooperation, including tourism services, aviation ICT services and enterprise cooperation. In terms of tourism services, both companies will work together to initiate a comprehensive business environment for the tourism value chain and to promote intelligent B2B tourist service, packaging and operation by integrating our ICT service and the China Airlines' tourism products.

As we mentioned earlier, we started researching cloud service opportunities within this tourism industry in mid 2010 and we are aware of entry barriers for new business. However, following the announcement of our cooperation with China Airlines, some tourism value chain partners have contacted us regarding possible business opportunities. We expect to play the role of mediators to create value for the different parties within the value chain and to provide tourism with a seamless service via our tourism cloud platform.

On slide 15, a combination of regulatory changes and the increased market competition resulted in pricing pressure in 2011. We anticipate that these pressures will continue in 2012, with market conditions impacting revenues and costs and expenses. However, we expect to generate growth momentum for our ongoing development of FTTx, fixed and mobile VAS, cloud computing, ICT-enabled service and enterprise solutions.

And that's all for our operational review. I'll hand over to Dr. Yeh for our financial review. Thank you.

Thank you, President Chang, and good day, everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 17. The following discussion is focused on the fourth quarter of 2011. Please refer to the slides for the full-year 2011 results.

Slide 17 shows our income statement on a consolidated basis. Total revenue for the fourth quarter of 2011 was TWD54.9b, a 5% increase compared to the same period of 2010, primarily due to the higher fixed line revenue resulting from the pricing rights shift for fixed to mobile calls and the increase in mobile VAS revenue and handset sales.

Additionally, higher construction revenue from our property development subsidiary also contributed to the revenue growth. This revenue growth was offset by the decline in revenue due to mobile and VoIP substitution, the mandated tariff reduction as well as our Company's tariff reduction.

Operating costs and expenses for the fourth quarter of 2011 grew by 10.2% to TWD43.1b. Income from operations increased by 10.4% to TWD11.8b. Net income decreased by 5.9% to TWD10b. EBITDA decreased by 7.2% to TWD19.9b, mainly as a result of the increase in operating costs and expenses.

Slide 18 shows our revenue for each business segment for the fourth quarter of 2011. In the domestic fixed line business, local revenues increased by 26.6% year over year, mainly due to the shift of pricing rights for fixed-to-mobile calls. The 13.1% decline in DLD revenues was due to mobile and VoIP substitution as well as reflecting the mandated tariff reduction.

Broadband access revenue, including ADSL and FTTx, decreased by 1.9% year over year, mainly due to the Company's tariff reduction in June as well as the mandated tariff reduction.

Mobile revenue increased by 7.3% year over year. The rise was mainly due to the growth in mobile VAS and the handset sales relating to our smartphone promotion, which offset the decline in mobile voice revenue resulting primarily from the fixed-to-mobile calls pricing rights shift and the mandated tariff reduction.

Internet revenue decreased by 1.7% also due to the Company's tariff reduction in June.

International fixed line revenue decreased by 1.1% mainly due to the decrease in international long distance service revenue as a result of market competition.

Others declined by 7.7% primarily due to the less revenue consolidated from the subsidiaries.

Slide 19 shows the breakdown of operating costs and expenses. The increase in operating costs and expenses in the fourth quarter of 2011 was mainly due to the increase in cost of handsets sold and the interconnection costs and transition fees resulting from the shift in the pricing right of fixed-to-mobile calls.

As shown on slide 20, cash flow from operating activities decreased by 9.4% year over year to TWD29.3b during 2011. We maintained a strong cash position as of December 31, 2011, with cash and cash equivalents amounting to TWD67.4b.

Slide 21 shows our 2012 unconsolidated forecast. Total revenue for 2012 is expected to decrease by TWD3.6b to TWD188.9b, primarily due to a TWD2.4b decline due to a reduction in tariff for domestic long distance calls, a TWD2b resulting from the mandated tariff reduction, as well as the broadband price cut, promotional packages for free on-net calls and the decline in voice revenue. However, our ongoing promotion of mobile Internet, broadband service, MOD and cloud computing service is expected to partially offset the decline.

Operating costs and expenses for 2012 are expected to increase by TWD2.5b mainly due to three reasons. First, the promotion of our mobile Internet and the broadband business; second, maintenance and the material expenses, which are expected to increase; and the third, handset costs relating to smartphone sales which are also expected to rise. Furthermore, expenses to acquire digital content are expected to rise relating to the content such as broadcasting rights for 2012 London Olympic Games. As a result, income from operations and the EBITDA are expected to decrease as compared to 2011.

Non-operating income is expected to decrease due to a decline of the profit relating to the construction sales from our property development subsidiary. Hence net income and the EPS are expected to decrease year over year.

Moving to slide 22. We will moderately speed up our capital expenditure for the following years. As mentioned earlier, we will focus on fixed and mobile broadband construction to facilitate the migration to even higher speed fiber solutions. At the same time, we'll also assess the efficiency of our CapEx utilization. Budgeted CapEx for 2012 is TWD33.1b and we will continue to focus on core business for future investments.

That's all for the presentation. We would now like to open up for questions.

(Operator Instructions). The first question is Danny Chu from Nomura. Please go ahead.

Hi. Thank you for the presentation. I have four questions. First is in terms of the CapEx guidance for 2012, can you help us to better understand of the TWD33b that the Company is going to spend in 2012, is it going to stay at that high level like into 2013 and years onwards or it is a non-recurring, like a trend for 2012? That's my first question.

Second question is with regards to the capital management plans. Can you help us to understand -- it's right now different the change in the Company Act? Is the Company leaning more towards paying out special dividends versus a capital reduction? Are there any key considerations in terms of like which strategy the Company will pick, i.e. between capital reduction versus special dividend? That's the second question.

The third question is with regards to the guidance, the earnings guidance given out for 2012. Like since we see that a 17% year-on-year decline in terms of the net income, is it a base case scenario or you're pricing in a worst case scenario for a 17% net income drop in 2012?

And last but not least, the final question is with regards to the participation in the China Airlines secondary offering. Can you help us to understand if it's like a must or mandatory that we have to participate in this secondary offering in order to have a strategic partnership with China Airlines? Thank you.

In answering to your first question, let me say that as we assess the market situation we believe it's the time to expedite our rollout of higher speed solutions and that's basically the reason for us to have higher CapEx for 2012. The higher speed may be up to 100 megabits per second. We will also monitor the market situation and to see how our customers receive this offering. So the actual spending will go along with the demands from the market.

And if the demands build up I believe it's good for the Company. Then we will probably continue this kind of rollout. Otherwise we will revise our CapEx spending for the following years. We will be dynamic and very responsive. Thank you.

On the capital management we would like to say that we keep our options open. We will consider whether to make use of this special cash dividend as permitted by the revised or amended Company Act or other means of capital management based on our performance, our operational results. And we will make proposals to the Board and AGM if we deem it necessary. But currently we keep this option open.

And I would like to add some background information since this topic has been discussed many times before. For the -- first of all, if we have cash we will focus on our operation use, our CapEx first. Then if there are any excess funds available we would see the payout of dividends. Then we would also, if there are some additional funds, then it's possible for capital management.

But as we observed in the past the source of cash for the past capital management came from the difference between the depreciation expense and the CapEx. And now, as you can see, now the difference is closed or maybe even it's possible CapEx might be even higher than depreciation in the future. So currently that's our observation.

And now that special dividend is a new option offered. And as the Chairman just talked about the nature of this special dividend, so we would take into consideration in the future.

And for the third question, it's about the guidance. I think it's unbiased one. It's the scenario we kind of believe is the most likely to occur. So it's not a worst case scenario. It's -- we believe it's most likely achievable.

And for the fourth question, it's kind of required to maintain a close relationship with China Airlines. In the process when we're talking about the possibility of getting some of their shares and we have some meetings with their management team, and I think our people contacted with their people before but we didn't receive the support as we are receiving now. So it's really important to have deeper relation in order to get their help. Otherwise they are also an independent business. So they wouldn't come to help us. But once we get some shares we can get a closer relationship. That's why we think it's necessary to have -- make this investment. Thank you.

If I may just ask very quickly a small follow-up question. With regards to the CapEx spending, so should we assume to have like the good old days, i.e. CapEx as a percent of sales somewhere between 10% to 12% is over and then now going forward, we should expect CapEx to sales for Chunghwa would be like around 17%, 18%?

The second follow-up question is with regards to the Board, by what day will they decide between capital reduction and special dividend? Thank you.

Regarding the CapEx trend, we used -- we have a reference, a benchmark reference for our CapEx to revenue as 15% and the 2012 is about over 17%. And if, as I said earlier, if the market response to our higher-speed offering is very positive then probably we will maintain for two to three years this rollout. Otherwise probably we'll reduce between this 15% to 17% level.

Regarding to the -- your follow-up second question is what date. Is that right?

By what date will we hear from the Board in terms of whether it will adopt capital reduction or special dividend as a way to pay the shareholders?

As the solution needs to be approved by both the Board Directors and also the shareholders' meeting, according to our agenda for this year's AGM it's going to be in June, so the last chance for the Board to consider this issue is in April. And if they -- yes, if special circumstances arise, a temporary AGM -- the shareholders' meeting will be called, then it's any time.

Thank you.

The next question is Chate Bencha from Credit Suisse, Hong Kong. Please go ahead.

Thank you very much for the call. Good afternoon, gentlemen. I just have four questions, if I may. The first question is regarding the mobile discount on the mobile data service that you're currently giving. When would this end again? Is it end of this year, end December 2012 and will you continue to see the impact throughout the year? So that's the first question.

The second question is regarding the broadband revenue that you expect to return to the level before tariff cuts in the second quarter of this year. Are you referring to the access revenue or to the ISP revenue or to both access and ISP?

The third question is related to the previous one. If this recovery in revenue would be through actually an increase in price or you expect to maintain the price at this level and that would be achieved through an increase in subscriber scale.

The last question is regarding the CapEx. I understand that the budget you set for 2011 was above TWD30b or so but you ended up spending only around 80% of that. Is it -- could it be the same case for 2012 as well that you're going to spend much less than the figure that you are giving out right now or you think that is already committed and we will see CapEx really increase to TWD33b? Thank you very much.

Let me answer the first and the third question. The first one is the mobile discount will end at the end of this year.

And the third one, how can we recover the broadband revenue has two sides. Firstly, enlarge our customer bases. As I just mentioned, there are still 100 -- several million customers that don't have data services and besides we will migrate our customers to higher speed, so higher speed means higher ARPU. Thank you.

The last question on CapEx, the spend in 2011 is around close to 90%, I believe. It's about 90% and -- 80%, okay, only 80%. And as I said we will gauge our spend on CapEx along with the market acceptance of our fiber solutions. And we would like to see -- we would like to expedite rollout of fiber solutions if our customers respond positively. And otherwise it could be slower and of course less CapEx to be spent.

Your question about the broadband revenue recovery, they are both from the ISP and the access.

Thank you. Just one follow-up question, on the dividend side. Thank you for the very detailed explanation earlier on. Just one thing I would like to clarify. In the presentation I understand that you suggest you would aim to maintain the stable dividend. However in light of your guidance for a decline in revenue into 2012 -- decline in earnings into 2012, does it mean that you will -- first of all, does that maintain stable dividend include special dividend as well? That's the first question.

And the second question is in the case that earnings decline and the regular dividend decline as well in line with the decline in earnings, would you increase the special dividend in order to maintain that level, or are we talking just regular dividend? Thank you.

Okay. I think, first of all, I'll give you some information for the CapEx. Last year the CapEx execution level is 85% of the budget. The budget number was TWD31.1b, that's related to. And also some of the reason it's below the budget number is sometimes the costs drop. Okay? So there are many factors to see how much we actually achieved in the end.

And for the dividend policy, I think so far we haven't finalized about how to use this option. This special dividend is still relatively new. But we understand it's important to have stable dividend income for some people. Some of the investors, they talk to us about this. So we have to clarify later on with the Board members about what they are thinking on those issues. Okay? But so far we want you to understand we are take this issue seriously and to see how should we do in the future. So, so far, we haven't made any decision or anything there yet. Thank you.

Thank you.

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

Hi. Thank you very much for the call and the opportunity to ask some questions. I have four key questions here. Firstly, in terms of your broadband revenue and the expectation of returning to the same level by the second quarter this year, do you feel that could be a bit challenging given the cuts in ADSL prices and also the cuts you expect from April 1?

On the second question, in terms of your mobile strategy this year -- and again you give a target of recovering ARPU by second quarter '13. Can you discuss what you believe you'll do different in your mobile strategy in 2012 and if the ending of the 20% discount, if it will actually have a resultant increase in churn? Is there a risk there?

The third part is in terms of the EBITDA margins. Can you discuss a little bit more detail about you mentioned maintenance and material expenses. Can you discuss a little more detail on that? And also maybe it's why you're maybe not seeing any increase in the mid-tier handsets, but I thought that would have helped maybe in lowering your costs overall.

And then fourthly regarding the MOD, which seems to be getting good traction, can you maybe give us a breakdown of how -- what the revenue contribution was from MOD in 2011 and any expectations for 2012? And also in terms of the broadcasting -- Olympic Games broadcasting rights, how much do you feel this is going to increase your content costs overall for MOD in 2012? Thank you.

Let me take your last question first. Okay. The broadcasting rights, in offering IPTV in our MOD service, Chunghwa Telecom, we maintain a platform, open platform for all the aggregators to have their programs to be broadcasted through our channels. And we control the content cost very carefully and we basically maintain the level that we spend as previous years. So we would not significantly increase our cost in content acquisition.

Okay. I think we want to clarify. The first one, your first question, we say we would return to the same level at Q2 '12, that means the broadband revenue related to our fiber solution, to our fiber access, FTTx. It's not the total broadband revenue because we are [testing and] talking about a price cut in June of the last year. That is related to the fiber. Okay.

And the second question you mentioned also needs some clarification. It's not related to mobile. It's also related to the broadband. It's talking about the overall impact including the ADSL cut earlier this year. The impact for the both, for the fiber and the ADSL cut would recover by the second quarter of year 2013. Okay. So that's the -- make the clarification about your question.

The MOD, I guess there are three parts. Number one is from platform is about 35%. From VOD it's about 10%. The other 50% is from the TV channels.

Can you repeat your question about EBITDA margin? It was a long question, I couldn't hear.

Okay. Sorry. Sorry about that. Yes, just in terms of the EBITDA, you had mentioned that -- well, actually not directly on EBITDA. You had mentioned in terms of operating costs, that you had seen an increase on maintenance and material expenses. Can you maybe discuss that in a little bit more detail? And I have just two follow-up questions post that. Thanks.

That is because the broadband service and the mobile service, the traffic increased. So we have to take on more of those maintenance. For example, the demand for the bandwidth increased for our mobile service. And we have to have more or upgrade the system and they need some more maintenance and the power, those kind of issues. Thank you.

Okay. And can I just follow-up? Sorry. So in terms of maybe on your mobile front, can you discuss a little bit more about how you feel ARPU will trend for mobile in 2012? What strategy does the Company have in that sense?

And then on the broadband side, I understand that you're increasing your broadband speeds a lot, but if does seem that very often the broadband speeds are being reduced in prices also. And I also see cable companies offering similar packages at maybe 10% to 15% discount to yourselves, similar high-speed packages. I just wondered, is that going to be a longer term issue for you or do you think the cable companies are not that much of a concern? Thanks.

Your question is about the broadband, not the mobile, right. About the broadband speed we are providing 100 megabits per second two-way. Compared to a cable company they can provide 100 megabits, but they cannot provide two way. Their upload speed will be much lower than ours.

Okay. Thanks. That's very helpful. And just in terms of your mobile strategy, what do you think you can do differently this year to help your overall mobile momentum? Thanks.

Because the smartphone is more popular -- actually, smartphone ARPU is higher than the feature phones. And this year we are focusing more, about 70% our handset will be smartphones. So comparatively the ARPU will be a little bit higher than last year, we hope.

Okay. Thank you.

The next question is May Lin from Yuanta. Please go ahead.

Hi. Thanks for the call and taking my questions. I have two quick questions. First in your 2012 guidance you've mentioned about there's TWD2.4b decline on revenue side due to the local domestic long distance call tariff cut. Is this the worst scenario or based on January actual operating result, what you think is realistic?

And second question is relating to your margin operating cost side. Can you talk a bit more about your current smartphone mix in terms of low-end, mid-end, high-end in terms of the volume of sales? I would like to get a feeling about is there any other room for us to lower the subsidy cost on offering more low-end side -- more lower-end smartphone side? Thank you.

Okay. For the first question it's -- as I earlier talked about for the financial forecast, it's the most likely case, we believe. So it's not the worst or best, it's just what we analyze the data. It's what we believe.

And for the second question is we have equally for high and medium and low-end smartphone. So we focus on all of them. And the number of units we sold is distributed evenly into the three categories. So I think one issue, whether we should offer more lower-end smartphones, it's interesting. But however we understand lower-end smartphone we can subsidize less. But however, at the same time, the ARPU for the lower-end smartphone user is also lower. So when we offer a smartphone package, we take it into consideration both of revenue and the cost. Thank you.

Okay. Sorry, may I follow up with a quick question? You mentioned about the low-end smartphone on your case generate actually lower ARPU. Can you clarify a bit what kind of price range you're -- based on your definition for the lower-end smartphone?

So our definition is something like below TWD10,000 or something like $300.

Okay. Great. A quick question. Your smartphone penetration rate in terms of total subscriber base at end of 2011, still like 15% something, based on your slides. I don't know if there is any missing. And your targeting 22%, or the number is incorrect on my side?

Yes, I think our smartphone penetration rate at the end of last year was about 22%.

22%?

Yes.

Okay. So any target guidance for end of 2012?

Our target is about 25%.

25%.

Right.

Okay. Thank you.

The next question is Steven Liu from SCB Hong Kong. Please go ahead. Steven Liu?

Thank you. I'm sorry. I have three questions. The first is regarding the data traffic offloaded by the WiFi. What is the percentage of data traffic that was offloaded by WiFi networks? The first question. Hello? Hello?

Yes it's about 8%, but in the special hot zone we offload about 30% -- it will be higher to 30%.

Okay. Thank you. And the second question is regarding the IPTV. I think you are very competitive in offering the [FTT] program compared with the cable TV operator. But my concern is is there any regulatory concern of your business in providing IPTV? And the second is what's your target penetration for IPTV subscribers, because you now have 5m broadband subscribers and only around 1m IPTV subscriber. Thank you.

The target number of customers for this year end is about 1.5m subscribers. Okay.

And regulatory concern over our IPTV operation, yes, we do have regulatory concern about our ability to offer channels service on IPTV. Currently the regulation prohibits us from owning any channel. So it is just platform here.

Okay, okay. And regarding -- last question is regarding the EBITDA. What's the EBITDA margin for mobile business and the fixed line business and what's the trend going forward?

We don't -- we didn't and we will not release these numbers. Okay? Thank you.

Any guidance on the trend on the mobile EBITDA margin is improving or still under pressure?

I think that the factors is if there is some pressure on the tariff, for example, this year the long distance call tariff reduction, of course it will impact EBITDA margin. And also are the higher costs related to, like I just mentioned, the maintenance and maybe handset sales, we have to look how it will develop. So we know the factors -- how the factors will affect EBITDA margin, but we need to wait until we see how those scenarios evolve. So, so far, we don't provide the trend. We just talk about what factors affect our EBITDA margin significantly. Thank you.

Okay, okay. Thank you.

The next question is Gary Yu from Morgan Stanley. Please go ahead.

Thank you. I have four questions. First one is regarding your mobile business. You mentioned that your growth rate, adjusted growth rate for last year was around 3% to 4%. What do you expect the growth rate to be for this year? Is it going to be accelerating based on the recent monthly trend?

And a related question is why are you still giving the discount for users using below one gig of usage per month when this has not been the case for your competitors?

The second question regarding your broadband business, do you foresee any further price cuts, either on the ADSL side or on the fiber network side, as you continue to accelerate the take-up rate of the fiber services?

A third question regarding your capital management plan. You mentioned that the capital management obviously depends on operational outlook. And then obviously, based on the guidance, you're expecting a double-digit decline in earnings. At the same time you are seeing higher CapEx requirement and the gap between CapEx and depreciation is lower. Would it be fair to assume that, at least in the near term, capital management is not one of the priorities of management to consider, given the conservative operational outlook and some CapEx burden in the next couple of years.

And lastly in terms of your M&A strategy, does Chunghwa Telecom have other industries where the Company is interested in terms of developing cloud computing platform? And if we expect more industries in cloud computing, should we also expect similar minority purchase in companies in those industries, similar to what's accommodated on China Airlines. Thank you.

Okay. For the last question, we do not rule out any possibility if we need to get more [domainology], or get some more cooperation from our partners. We don't rule out the possibility to invest. Okay. But however we would do this with some guidance. Our Chairman will talk about the guidance.

Regarding M&A strategy, the Company has an internal regulation. This is -- the regulation requires the approval from the AGM. The regulation dictates that the non-telecom investment cannot exceed 20% of our paid-in capital. And so this -- the number really everyone has about our paid-in capital. That means it's about TWD15.5b. And our current investment, according to our calculation, those that can be classified as non-telecom-related amounts to about 73% of that amount. So actually we would be very prudent in considering any M&A opportunities. And besides that, the Company focused on our core business and this principle will not change.

The CapEx, the capital management issue I mentioned two times in this conference call. We will keep our options open and we will gauge our operational results and make proper decisions at the right time. And we do not rule out any possibility.

I would like to emphasize the 20% of the capital limit for M&A type is related to non-telecom investments. So if it's directly related to telecom investment, then it would not subject to the 20% balance restriction. Thank you.

Related to the first question about the mobile business, of our forecast about the growth rate, it's about 1% this year because of this tariff cut what will be happened in April.

And second question is about the price discount about why we got this. Because we announced last year, so it will last until the end of this year. So we should (inaudible).

The third one was about the price cut for broadband ADSL, and I think we don't have this any very competitive pressure from the market. We don't have any plan to do that.

Regarding your question number three, the ADSL it used to subject to NTC's regulation on so-called [X sector]. And actually we have conversations with NTC regarding this special service. We would talk to NTC about not implementing any new deduction on ADSL this year and the following three years.

Thank you. Can I -- can management repeat again what is the current non-telecom investment as a percentage of paid in capital?

This is 73%.

73%. 73% of your paid-in capital?

No, no. Not of the -- of the 20% of the capital. The restriction is 20% of the capital. Currently the capital is around like TWD77b. Okay. And the maximum amount is 20% of the TWD77b. So that means TWD103 -- TWD15.4b. And 73% of that TWD15.4b.

Okay. Got it. Thank you.

Then let me go to the question number four. First I want to make the distinction currently for the new corporate law amendment, we call those as a special dividend. So our Chairman earlier talked about the policy for the special dividend is as a supplement in case the dividend is low. And -- but however I mentioned about capital management is referred to those capital management plans we have executed in the last few years. And I emphasized we need to find source of funding. So I -- you have to make distinction between these two. But for the special dividend type, we still have some cash balance. We still have some reserve for that. But it depends how we evolve. So these are two different kind of issues in our thinking. Thank you.

The next question is [Sidney Chang] from Merrill Lynch. Please go ahead.

Hi. I have four questions related to your mobile network. One is on your smartphone. What's the average usage per smartphone user per month?

Second question is on your mobile network. What's the network utilization rate right now?

Third one is that you have a big increase in the mobile network CapEx. So how many new sites, new cell sites are you adding this year?

And lastly on your 2G spectrum. I saw your earlier slides that you're saying 2G license are expiring on 2012 and 2013. So how much are you spending this year to extend those licenses and what's your plan to reform some of those in the spectrum in the future few years? Thanks.

The usage, average usage for smartphone is 1 giga.

The mobile network utilization rate, this really depends on the location. For certain hot zones or hot areas it's relatively high. But in certain areas, especially in the rural areas, during the weekdays, not holiday, the utilization factor is low. In average the utilization is not really that high. But customers will complain when congestion occurs during very special areas or special -- the peak period. That causes the issue here. So as we presented, we enlarged our capacity at those hot zones or hot areas, hot spots.

Maybe I'll ask it a different way, that, so for your -- every -- on average -- so let's say how many percent of the sites that have used the second carrier and how many percent of sites that have already deployed a third carrier?

I understand that in certain situations we do make use of a third carrier, but not everywhere. I don't have the percentage with me here.

The number of base stations to be added this year, for those with HSPA Plus it's about 4,000. And then we keep monitoring the coverage and add new sites wherever it's possible.

So these 4,000 sites are around the existing sites, right?

The more dense populated areas, yes.

Okay.

Our 2G license, our Company is now -- or NTC is now working on extending the licensing period until 2017. So we have already submitted our proposal to extend licensing period.

And the maintenance CapEx, well we have to maintain the quality of service so we sometimes need to replace certain base stations which have been in place for several years. Okay? And all those are included in our CapEx plan.

Okay. Thanks.

Thank you.

The next question is Piyush Mubayi from Goldman Sachs. Please go ahead.

Thank you. I just have one question. What is you current FTTH home pass number and what do you target in three years? Thank you.

When you talk about the home pass number, I believe you're referring to cable penetration. And the cable network home pass is still -- is a parameter that is being discussed. And in our IPTV, our MOD offering we make use of our telecom network. And it's really our broadband, broadband subscribers who -- it's the subscriber registered for HDTV quality. Then it's 10 megabits per second or higher access speed is required. So in referring to the home pass number, it's really the utilization of our broadband subscribers with certain minimum data rates. So it's different, a little bit different from the cable industry's penetration consideration. Yes.

Okay. So I presume that -- when you mention fiber, for example on slide 10, you've got a chart showing your fiber count rising from [434,000] to 1.034m in 2012. And these would be customers who can get fiber speeds in excess of 50 M on fiber. I presume this will rise quite significantly in two or three years and this is one of the reasons why the CapEx, in your opinion, is going to remain high for the next two or three years, provided there is demand. Now if I can put the question in another way, what is the percentage of customers today who can get speeds in excess of 50 mbps on your broadband network?

Well the higher speed requires fiber solutions, and especially for those that are higher than 50 megabits per second fiber coverage. And we do have plans to roll out fibers if we have demands from the market. Currently the penetration rate is relatively low at this stage, but we are able to respond to market demand. If we see that demand, we will categorize in three aspects.

One is the fiber is already there in the building and we are able to offer the service within one week. And the second category is we are able to offer this service within three months. And then it's not yet -- we need to take the laws and a lot of other framework, then it requires more time to offer the service. And we are working on this, yes.

Okay. So if you -- based on that one-week definition or the three-month definition, if you were to combine both one week and three months, what percentage of homes in Taiwan can get fiber services within three months?

Well we -- I'm sorry, we do not disclose this kind of numbers to you. Thank you.

All right.

Okay. If there is no more questions, thank you very much for joining us on the results of 2011.

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. Good bye.

Thank you very much. Bye, bye.