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China Unicom (Hong Kong) Limited (NYSE:CHU)

2012 Earnings Call

March 21, 2013 9:00 am ET

Executives

Xiaoke Zhou

Yimin Lu - President and Executive Director

Fushen Li - Chief Financial Officer and Executive Director

Gang Li - Senior Vice President

Zhengxin Jiang - Senior Vice President

Analysts

Colin McCallum - Crédit Suisse AG, Research Division

Cynthia Jinhong Meng - Jefferies & Company, Inc., Research Division

Lucy Yajun Liu - JP Morgan Chase & Co, Research Division

Sydney Zhang - BofA Merrill Lynch, Research Division

Michael Meng - BOCI Research Limited

Lingling Hu - Goldman Sachs Group Inc., Research Division

Operator

Welcome to today's China Unicom Hong Kong Limited 2012 Annual Result Announcement Conference Call. [Operator Instructions] Please begin, Zhou.

Xiaoke Zhou

Ladies and gentlemen, good evening, good morning and good afternoon. My name is Zhou Xiaoke. I'm the Director of Investor Relations in Hong Kong with China Unicom. I'm the host and translator for today's conference call. First of all, let me introduce the senior management team present today: Mr. Lu Yimin, Executive Director and President; Mr. Li Fushen, Executive Director and CFO; Mr. Li Gang, Senior Vice President; and Mr. Zhang Junan, Senior Vice President.

Before we go for a Q&A, let me make a very brief summary about China Unicom's 2012 performance. Industry-leading revenue growth. Our service revenue growth is 4.1 percentage points higher than the industry average, and our market share, up 1.5 percentage points. Second, we further optimized the business structure. The mobile's share of service revenue up to 60%, and non-voice's share of service revenue up to 53.1%. Number three, the scale growth in key businesses. Our 3G service revenue, up 82.6%; and our broadband service revenue, up 11.8%. Number four, rapidly improved profitability. EBITDA over service revenue, up 0.5 percentage point, and our net profit, up 68.5%. Lastly, we significantly enhanced network capability, with all our 3G base stations upgraded to HSPA+ and our share of FTTH/B access ports up 14 percentage points year-on-year.

So that's the very brief summary of our major achievements for 2012. Now we open for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Colin McCallum from Crédit Suisse.

Colin McCallum - Crédit Suisse AG, Research Division

I wanted just to ask about the revenue trajectory into the fourth quarter. The revenue was very flat, did not seem to increase much in the cellular division. Can you tell me was there any adjustment that happened in the fourth quarter that adjusted for prior quarters? Or are we looking at a clean number, whereby, the revenue really did not increase much? If that's the case, could you maybe give us any reasons why the revenue did not increase much in cellular in the fourth quarter?

Xiaoke Zhou

Let me translate first. [Chinese]

Yimin Lu

[Chinese]

Xiaoke Zhou

Mr. Lu Yimin answered this question. And if we look back what happened in 2012, remember the first quarter, second quarter and the third quarter, remember that Q on Q growth actually is quite solid. And turning to the 4Q, well, overall, the business fairly still remained healthy. But I would say our system of provincial branches, we try to balance between top line growth and the bottom line performance. So in some case, some provincial branches may just focus more on the bottom line, okay, so that we can reach the profit target. So that means the -- so, actually, to some extent, the marketing effort in 4Q. And within that, I think the results is kind of rigorous in the 4Q in terms of top line growth.

Operator

The next question is [indiscernible] from GIC.

Unknown Analyst

I've just got a question on your balance sheet. The debt has moved a lot from long-term debt to short-term debt. I'm just wondering what are your plans to either roll that debt over or refinance a lot of the short-term debt that's on your balance sheet now. The second question is just on your mobile traffic composition. I wonder if you could give us a split between inter-network traffic, traffic to China Mobile and China Telecom and traffic to fixed-line for your mobile business.

Xiaoke Zhou

Let me translate the question first. [Chinese]

Fushen Li

[Chinese]

Xiaoke Zhou

Mr. Li Fushen answered the first question. Actually, in 2012, our short-term debt actually increased. So the major reason here is that, okay, China Unicom has not credit facility from the net banks, and so with a lot of short-term debt from the net banks and that accounts [indiscernible] financial cost. So looking at the future, the company will continue to balance between the long-term debt and the short-term debt, but the purpose and the goal is very clear: to minimize the possible financial cost.

Operator

Next question is Cynthia Meng from Jefferies.

Xiaoke Zhou

Operator, I haven't finished with the second question yet.

Yimin Lu

[Chinese]

Xiaoke Zhou

Mr. Lu Yimin answered the second question about the mobile traffic between different operators. In 2012, the outgoing calls from China Unicom to China Mobile, actually, year-on-year grow by 24%. We reached about 192.6 billion minutes -- sorry, increase by, not 24%, 6%, around 6% to 192.6 billion minutes. And outgoing calls through China Telecom increased by 15%. And even the incoming calls from China Mobile actually increased by 3%, and incoming calls from China Telecom increased about 9%. That's the roughly kind of a structure of mobile traffic between different operators.

Operator

Next question is Cynthia Meng, Jefferies.

Cynthia Jinhong Meng - Jefferies & Company, Inc., Research Division

[Chinese]

Xiaoke Zhou

Let me first analyze and translate the questions from this lady. That's 3 questions. One is about the depreciation, any guidance on that for 2013 either in terms of growth rate or in terms of the pricing of the percentage of such value. The second question is about handset subsidy. I realize back in 2012, handset subsidy as a percentage of services revenue actually down to 10.2%. Any guidelines for 2013, higher or lower? And the third question is about the total number of employees at the year end of 2012.

Fushen Li

[Chinese]

Xiaoke Zhou

Mr. Li Fushen answered the first question. Back in 2012, our depreciation grew by 5.2% year-on-year and as a percentage of service revenue, declined. And looking to 2013, because we have RMB 100 billion CapEx spending back in 2012, that will bring a new depreciation in 2013. So we expect that depreciation could grow by 6% in 2013, and depreciation as a percentage of service revenue will continue to drop.

Gang Li

[Chinese]

Xiaoke Zhou

Mr. Li Gang answered the second question. I say the common strategy -- our handset subsidy is now -- we still want to use handset subsidy to attract our new users in 2013, so which means that absolutely [ph] handset subsidy will continue to increase in 2013, but handset subsidy as a percentage of service revenue will continue to decline. And also, the handset value per subscriber also will decline.

Yimin Lu

[Chinese]

Xiaoke Zhou

Mr. Lu Yimin answered the third question. As at year-end 2012, the total number of employees was 289,000, down 2.8% year-on-year.

Cynthia Jinhong Meng - Jefferies & Company, Inc., Research Division

[Chinese]

Xiaoke Zhou

Let me translate first. One more question from this lady. It's about CapEx.

Mr. Jiang Zhengxin, you mentioned this afternoon that 80% of CapEx this year will be allocating to mobile broadband, transmission network and 20% on 3G infrastructure and the IT system. Can you give me a more detailed breakdown within that 80%?

Zhengxin Jiang

[Chinese]

Xiaoke Zhou

Mr. Jiang Zhengxin answers this question. Among 80% CapEx margin for 2013, around 40% will go to mobile network, around 30% on transmission, around 30% on broadband. And the rest are probably some others, okay, like some kind of an energy saving technology venture.

Zhengxin Jiang

[Chinese]

Xiaoke Zhou

For the rest 20%, it will most probably go to IT systems. The rest will go to base infrastructure including agencies and the machineries in the central [ph].

Operator

Next question is Lucy Liu from JPMorgan.

Lucy Yajun Liu - JP Morgan Chase & Co, Research Division

[Chinese]

Xiaoke Zhou

Let me translate the question first. Two questions from this lady. One is about the competitive landscape in 4G and what's the common strategy, for example, how to retain your hand customers? Second question is about the 900 megahertz we got it approved from the government to roll out in 21 province, and I want to know more details, for example, are influx more on the countryside or are can use 900 also in urban areas?

Gang Li

[Chinese]

Gang Li

Mr. Li Gang answer the first question. First of all, we don't need to worry too much about the 4G because the difference between 3G and 4G is mainly speed. And if you look at our current switch network, right now, we can -- we already upgrade all our 3G base into HSPA+, so we can offer speed up to 20 Mbps. In some areas, you'll see technology, we can offer speed up to 42 Mbps. So that, I think, is the main point, point number one. Point number two is that I think of the overseas market on the 4G side, when the 3G transition reach 50% or 60%, then there is a demand for 4G. Even at that time, the 3G still go very slow, okay? So that's 2 points I want to say, okay, we don't need to worry much about the 4G market or competition. And within China Unicom, we still have kind of the confidence about our 3G services because, first of all, you can look at our brand. Our 3G is already the #1 3G brand in China. If you look at the handset, obviously, handset definitely has a huge advantage in terms of the number of models or the quality or the pricing issues are still the best among the 3 given technologies. And also recently, we have enhanced our data phone operations. And that also had [indiscernible] to stimulate the data usage. But obviously, put it all together, I think we can still see a lot of growth room for our 3G service in China in the next 1 or 2 years.

Zhengxin Jiang

[Chinese]

Xiaoke Zhou

Mr. Jiang Zhengxin answers second question. To answer second question, I would like to add one more point to the first question, which is that even in 4G, our team at Unicom can still maintain some certain advantage because, basically, we have a very solid 3G infrastructure. That can help us to build the future 4G network. We can build in a much faster rate, and here, I think, starting from last year, the company has already invest into the local transmission network using new technology called AP RAN [ph]. That can help us to support a strong demand, data demand, in the future brought about by our team. And also, because we have a very good 3G infrastructure, we don't need to roll out in a very light scale, the 4G network. We can just start the 4G construction in urban areas and some hot areas. So that means, okay, we don't need to invest a lot in the 4G network. I just mentioned in the afternoon that on an annual basis, we may just increase -- invest about RMB 5 billion, RMB 10 billion on our team. Go back to the second question, 900 megahertz. Last week, [indiscernible] just approved China Unicom's spectrum to roll our 3G network in 21 province. So the detailed way to use that, again, 900 megahertz, that we use part of 900 megahertz spectrum to our 3G servers. So far right now, we have 6 megahertz, so we can use probably 3.8 for our 3G servers and the remaining still for the 2G. And our strategy right now on 900 is still try focus on the countryside, to try and use this 900 spectrum to roll out the 3G network in a more efficient way out in the countryside, in the Mid and Western China and also in the main transmission [ph] lines. And of course, the spectrum, the efficiency advantage is slower -- much lower now through spectrum. And to use 900 can save a lot in the CapEx. We estimate, okay, if we use 900 megahertz, we can build 20% or say even less base stations, saving 40% or 60% of CapEx. And so far, we still target 900 megahertz for the countryside. For the urban areas, we think we still -- we have some kind of challenges because we have a lot of customers in urban areas and also have a lot base stations there. So that may cause serious in the period issues. So I think we're focused more on the countryside.

Lucy Yajun Liu - JP Morgan Chase & Co, Research Division

[Chinese]

Xiaoke Zhou

Let me translate the question first. One more question from this lady. Can we brand our HSPA+ services, 4G, before we go to the 4G network?

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang answered this question. I think this is a very good suggestion. We looked over to the market, we found that some countries just define any speed up to more than 21 meg as a 4G. So if we look at our network right now, all the service have been upgraded to HSDPA+.

Operator

[Operator Instructions] Our next question is Sydney Zhang from Bank of America.

Sydney Zhang - BofA Merrill Lynch, Research Division

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Let me translate the question first. Two questions from this gentleman. One is for the personnel cost. You notice that personnel cost increased by 8.2% last year, any guidance for this year? Especially, the salary of China Unicom is still lower than the other 2 operators. And the second question is a more technological question, it's about whether -- when we upgrade our HSDPA+ into 4G, can we change the antenna?

Fushen Li

[Chinese]

Fushen Li

Mr. Li Fushen answered the first question. Last year, our personnel cost increased by 8.2%, lower than the gross rate, the revenue gross rate. So personnel cost as a percentage of revenue was up by 0.6 percentage points. Looking to 2013, I think, we will continue to implement the basic policy that will link the total personnel cost total to the performance and also to coordinate with the government's relevant reform. So I expect the total personnel cost will continue to grow and as a percentage of sales revenue, it would remain stable.

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang answered the second question. As I just mentioned before, we can see a lot of money when we -- we're fortunate because we have a very good 3G infrastructure we can leverage. For example, the core network, right now it's co-share by our 2G, 3G and also part of future 4G. And before, I think, it's 30% up to 80% of our core network can just go for 4G plan for purely software upgrade. And in terms of transmission network, because we are being proactively deploy the HSPA line technology, that also can meet our future LTE demand. And that also the cost compared with the old MSTP technology can save up to 35% of the CapEx. And now you asked me about the antenna, and because the future 4G spectrum is the same to our existing suite spectrum, so we can -- also can share antenna when we upgrade to 4G from 3G.

Sydney Zhang - BofA Merrill Lynch, Research Division

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

One more question from this gentleman about the tax reform. Any progress on that?

Fushen Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Fushen answered this question. There's no new information shared at this point on tax reform. We are still discussing the issue with the Latin government authorities. So it's hard for us to give any estimate on the cost of impact on our taxation.

Operator

The next question is Michael Meng from BOCI.

Michael Meng - BOCI Research Limited

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Let me translate the question first. Two questions from this gentleman. One is about our previous service revenue, any further breakdown on this part of the revenue? Non-voice, voice and within non-voice further breakdown? The second question is about the broadband business in 4Q. We realized some kind of slow down in 4Q and also in January and February of this year, the broadband net also is not that strong. Any guidance on the trend on this part of the business?

Yimin Lu

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Lu Yimin answered the first question. The service revenue was RMB 59.8 billion in 2012, of which RMB 29.6 billion is from voice, year-on-year up 79.3%. For the non-voice, the revenue was RMB 30.11 billion, year-on-year up 83.1%. A modest non-voice revenue on the majority from the enhanced handset Internet access, which was about 18, 1-8, RMB 18.57 billion. And then the data card revenue around RMB 3.3 billion, SMS also around RMB 3 billion, that's the major part of the non-voice business.

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang answered the second question. First of all, overall, our fixed line business, on the broadband side because the broadband China strategy, our overall broadband business is in their houses and not only in part of -- one part because the net adds still remain quite solid. And also if you look at the speed for our customers, the percentages also increased revenue. And for the voice side, I think it still declined but I think it will kind of slow down. So that, put together, we can see growth in our overall fixed line business. Back in 2012, the fixed line revenue actually grew by 1.9%. Then looking to 4Q, sometimes slowdown in terms of broadband net add I will say that's maybe because it's seasonal. It's the best reason because most our broadband is located in Northland China. So compared with other quarters, the net add in 4Q in Northern part of China as you can see is lower, so that's even -- that's more like seasonal. But on the other hand is that, if you look at the percentage of the high bandwidth customer actually improved in the 4Q last year.

Michael Meng - BOCI Research Limited

[Chinese] Follow-up on the question. [Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Let me translate the question first. One follow-up question from this gentleman about the price. He realized that in the second half of this year, the revenue per megabyte actually dropped substantially, he want to know the reason and the trend.

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang answered this question. Listen, there are 2 reasons, one is that in the second -- in the 4Q last year, we changed our strategy regarding the relationship between 2G and 3G from service to differentiate 2G, 3G operations to combine 2G, 3G operation. We encouraged our 2G customers to upgrade to 3G by subscribing some data value package. And those package actually, discount the price, I think, could be some reason to lower the revenue per megabyte. The second reason is that if you see our package right now, I think the unit price hasn't changed. Either try to promote some kind of daily, monthly or half-year package based on volume. And that, I think, also will attract down the unit cost price.

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang add one more point. If you look at the 3G ARPU, it declined, mainly because you have the low -- the more lower-end customer joining in, especially when we tried to promote our existing 2G customers up to the 3G. But the ability [ph] of our old customer we have, actually ARPU increased. But put together, you can see our blended operation increased.

Michael Meng - BOCI Research Limited

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

The following question from Mr. Meng about the -- those 3G customers are [indiscernible] newly added 3G customers, [indiscernible] 3G customers account for 30%?

Yimin Lu

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Lu Yimin want to clarify that, that 20% is defined as 2G customers among our newly added 3G customers, okay.

Operator

The last question is Lingling Hu from Goldman Sachs.

Lingling Hu - Goldman Sachs Group Inc., Research Division

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Let me translate the question first. Two questions from this lady. One is about the 4Q's marketing expenses -- after deducting kinds of [indiscernible] net cost still go very fast, actually, even faster than the top line growth, she want to know the reason. And the second question is that, she noticed that back into last year, our ad income was RMB 1.3 billion, okay, and that of course includes some dividend from Telefonica. So she wants to know the trend in 2013? And third question is about, we mentioned our plantation that we changed that leasing of the contract user in the second half of last year, she want to know the detail, what's changed?

Yimin Lu

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Lu Yimin answered the first question. The rapid increase in said marketing in 4Q is mainly because of commission. Because I think the net has probably gotten some kind of seasonal. It goes back in 4Q, we have conducted a lot of the settlement with our certified channels and that result in revenue increase and the commission expansion.

Fushen Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Fushen answered the second question. Last year our income, RMB 1.3 billion, mainly include the dividend and other income. And last year we received, given from Telefonica, about RMB 412 million. And of course, there's a change of the dividend policy from Telefonica, but we expect that it will not come back again in the dividend this year. So I don't expect any major change in terms of dividend income from Telefonica this year compared to last year.

Lingling Hu - Goldman Sachs Group Inc., Research Division

[Chinese]

Gang Li

[Chinese]

Lingling Hu - Goldman Sachs Group Inc., Research Division

[Chinese]

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Li Gang wants to clarify, actually, it's not the change of the definition. Actually, what happened is that a change in terms of a way to -- on the packaging of the contract users.

Lingling Hu - Goldman Sachs Group Inc., Research Division

[Chinese]

Gang Li

[Chinese]

[ id="E03" name="Xiaoke Zhou" type="E" />

Mr. Li Gang answered the last question, right. On the 3G ARPU side, I think, actually, 3G ARPU is closely related to how fast we expand our 3G subscriber base. When we try to add more customers on mass market that means, okay, our ARPU will decline because we have a lot of the low-end customers. And especially -- from 4Q last year, we try and we opened our 3G network to our existing 2G customers by subscribing to certain data-only package, that also put some pressure on our 3G ARPU. But the point of this is that our existing customers, no matter where they are from, from outside, from our 2G, the collection [ph] is increasing. And that will, to some extent, will bring down the ARPU decline trend or decline pressure. So I think -- we hope that this ARPU, the current rate, kind of slowdown this year.

Okay. Due to the time limit, I think we have to conclude tonight's global conference call. Thank you again who attend our global conference call. And if you have any further questions, please contact our IR department in Hong Kong or Beijing. Thank you.

Operator

This concludes our conference call. Thank you for attending. Goodbye.

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