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

H1 2013 Earnings Call

August 08, 2013 9:00 am ET

Executives

Xiaoke Zhou

Yimin Lu - President and Executive Director

Fu Shen Li - Chief Financial Officer and Executive Director

Zhengxin Jiang - Senior Vice President

Analysts

Danny W. Chu - Macquarie Research

Janice Chong - S&P Capital IQ Equity Research

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

Sydney Zhang - BofA Merrill Lynch, Research Division

Steven Liu - Standard Chartered PLC, Research Division

Cynthia Jinhong Meng - Jefferies LLC, Research Division

Donald Lu - Goldman Sachs Group Inc., Research Division

Bin Liu - Citigroup Inc, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the China Unicom Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 8th of August 2013. I would now like to hand the conference over to Mr. Zhou Xiaoke. Thank you. Sir, please go ahead.

Xiaoke Zhou

Thank you, operator. Good evening, good afternoon and good morning, ladies and gentlemen. Welcome to China Unicom Hong Kong Limited 2013 Interim Results Global Investor Conference Call. My name is Zhou Xiaoke and I'm Director of Investor Relations of China Unicom, and I am the host and the translator for today's call.

First of all, let me introduce the management and the senior staff present tonight. Mr. Lu Yimin, Executive Director and the President; Mr. Li Fu Shen, Executive Director and CFO; Mr. Li Zhengxin, General Manager of Finance Department; and Madam Wong Xa [ph], Deputy General Manager of Board of Directors.

Before we go to the Q&A session, I will briefly summarize our key interim results and the major achievements. Just a reminder, the interim results announcement, presentation and press release have already been published on our website, www.chinaunicom.com.hk.

The following is the highlight of our interim result. One, continued fast revenue growth, service revenue up 13.8%, exceeding industry average by 4.9 percentage points. Second, further market share increase, increment market share surpassed 30%. Third, further improved profitability, EBITDA over service revenue up 1.0 percentage point, net profit up 55%. Fourth, rapid development of key business, 3G sales service revenue up 52.1%, broadband service revenue up 10.4%. Fifth, continuously optimized business structure, non-voice and mobile shares of service revenue reached 55.3% and 62.6% (sic) [62.5%], respectively. And lastly, continuously enhanced network capabilities, 33,000 new base stations, 3G service added in the first half of this year, and the whole network upgraded to the HSPA+ and speed up to 42 Mbps in some cities. So that's some kind of the major highlights of our interim results. Now we are open to Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Danny Chu from Macquarie.

Danny W. Chu - Macquarie Research

Got 3 quick questions. First, is it possible to provide a breakdown of the CapEx RMB 22 billion between mobile, broadband and infrastructure categories? My second question is, can you give us an -- some indication right now, roughly how many cities the HSPA+ network is operating at 42 Mbps? And the final question is, in this afternoon's management presentation, highlighting that the 4G CapEx for next year should still stay around RMB 5 billion to RMB 10 billion, but at the same time, the management talked about building a trial network for TD-LTE. So any roughly indication what is the amount to be spent on the trial network for TD-LTE? Should we assumed 10% relative to the RMB 5 billion to RMB 10 billion budget for FDD-LTE, 20% or 30%? So any guidance will be greatly appreciated.

Xiaoke Zhou

Let me translate first. [Chinese]

Yimin Lu

[Chinese]

Xiaoke Zhou

For the first question, Mr. Lu Yimin answered that in the first half this year, the company has taken measures to improve overall investment efficiency, okay, and most of the CapEx actually spent on mobile, broadband and data, as well as infrastructure and transmission networks. A rough data is as follows: mobile about -- accounting about 37% of the CapEx, 3-7; on broadbrand data account about 23%; and the infrastructure and the transmission account about 35%, 3-5.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the second question, actually, we upgrade networks to offer speed up to 42 Mbps in some key cities and as well as some hotspot areas, including Beijing, Pearl River Delta and the Yangtze Delta River areas -- Yangtze River Delta areas.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the third question on TD-LTE, I think the management is making very clear in this afternoon's analyst briefing, as well as the press conference, that the company's priority job so far is still for some 3G business first, on how to prepare to -- going from WCDMA to LTE-FDD, okay? But of course, after consideration, some mobile technological trend, in support of the domestic technology, as well as the spectrum and synergy, we also decide to start some kind of a TD-LTE trial network in the second half of this year. But we are still in a very early stage. We are still in discussing and starting how we're going to build. But it's too early to talk about the amount we're going to spend on TD-LTE. What I can tell is that, that month should still kind of very small portion of the budget that we right now provide on LTE at RMB 5 billion to RMB 10 billion.

Operator

And our next question comes from the line of Janice Chong from S&P.

Janice Chong - S&P Capital IQ Equity Research

Just a couple of questions. Number one is on CapEx guidance for 2013. Are you still seeing CapEx at around RMB 100 billion as you have guided in early this year? And also, I'm just thinking of how you're going to -- how are you planning on managing your CapEx expansion in terms of TDD and FDD? Obviously, you are looking -- it looks like you're taking -- adopting a hybrid network approach right now, just like China Telecom, so I just wanted to know your view on that. And my second question is on network operation and support savings. It appears that the ratio cost -- the ratio has come down to 13.7% in the first half of 2013. I was wondering what were the drivers for that and do you see this sustainable going forward. And my third question is on whether you have any plans in moving into smart devices just like China Mobile.

Xiaoke Zhou

Let me translate the question first. Let's -- maybe I just want to make -- correct your first question, all right? Our budget, CapEx budget, for next year is no more than RMB 8 billion, okay, not RMB 100 billion. Okay?

Janice Chong - S&P Capital IQ Equity Research

Okay.

Xiaoke Zhou

Okay. Let me translate the question first. [Chinese]

Yimin Lu

[Chinese]

Xiaoke Zhou

Let me translate the first question answered by Mr. Lu Yimin, okay? Just try to correct, I think the CapEx budget for this year is around RMB 80 billion, not RMB 100 billion, okay, and I think that budget will remain more or less similar, even after considering we probably would conduct some kind of TD-LTE trial network constructing or as well some kind of FDD-LTE trial network construction. So I don't think the budget will change, still probably around RMB 80 billion. The second question will be answered by our CFO, Mr. Li Fu Shen.

Fu Shen Li

[Chinese]

Xiaoke Zhou

Actually, the reason why, year-on-year, that cost hasn't gone up a notch because we completed the acquisition of Unicom New Horizon last year, okay? And that has saved a lot of the network and operation and supportive costs, okay? If we don't consider that fact, that acquisition, actually the network operation and the supporting spend actually year-on-year up around 11.1%, but still below our top line growth. That means, okay, as a percentage of revenue, it still declined by around 0.4 percentage point. Looking forward, like in second half of this year, I think the maintenance cost or the rental cost may continue grow, but I think the growth rate in that category, I think, will continue below our top line growth.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the third question, whether Unicom has a plan to launch their own smartphone, I can tell you that, so far, we don't have this kind of plan. We're still seeing our vendors can do that job much better now, so I think that the -- maybe is the better way to focus on each area we think we have the advantage.

Operator

And it's from Lucy Liu from JPMorgan.

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

[Chinese]

Xiaoke Zhou

Let me translate the question first. The lady has 2 questions. One is about our 3G smartphone user data usage. She mentioned that China Unicom reported very solid side of the interim result, but she also noticed that, okay, our data usage per 3G smartphone user actually did not go up by a substantial amount, just from last year's 256 megabyte to this year's 278. So she wanted to know the reason because she noticed that in a lot of countries' other market, that increased quite substantial. The second question is back to the LTE. She wants to know from the margin point of view, what [indiscernible] time the government will issue the TDR-LTE license.

Yimin Lu

[Chinese]

Xiaoke Zhou

Okay. Regarding the first question, actually, we also noticed that, I think, last week, our data usage growth for smartphone users. I guess, there are a couple of reasons. One, is that I still think we haven't got very popular, very data-extensive applications. I mean, that application hasn't, for example, the Radio Central hasn't evolved yet -- in China yet.

Yimin Lu

[Chinese]

Xiaoke Zhou

Another reason I want to say, probably some kind of related to our existing 3G packages. So we are actually reexamining those packages to try to find out why -- whether it's some kind of a reason, has not stimulated data demand among consumers. So that also is the reason why we have some kind of cooperation with Internet players such as Soku, such as Tencent. So I think by trying those kind of new way to exploit the market, I think, probably we can still meet the data demand in a better way and a faster way.

Yimin Lu

[Chinese]

Xiaoke Zhou

So we are still quite confident with the overall mobile Internet takeup in China. We definitely expect consumers to use more and more data.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the second question, I think the management has rather made very clear in the afternoon's analyst briefing which is, one, we still work on the upgrade from WCDMA to FDD-LTE and we will have been proactively make some preparations on the trials on that front. And the second is that after considering the mobile technology trend, as well as some kind of spectrum, we saw synergy. We also did that to start the trial on TD-LTE. I'm saying if you oversay it, a lot of mainstream operators are also taking this kind of similar approach, for some FDD-LTE, but also consider some kind of a deployment of TD-LTE so that they can better use the pressure spectrum resources.

Yimin Lu

[Chinese]

Xiaoke Zhou

As to when the government will issue the FDD-LTE license, I think it is still not clear because so far we don't know even when the government will issue the TD-LTE license. So it's really too early to tell. But having said that, no matter how, I think, first of all, the company will closely follow the LTE progress in terms of FDD-LTE or TD-LTE. Secondly, we're going to continue first our existing 3G business and WCDMA network.

Operator

And our next question comes from the line of Vicky Lin from Merrill Lynch.

Sydney Zhang - BofA Merrill Lynch, Research Division

[Chinese] Sydney Zhang [Chinese]

Xiaoke Zhou

Let me translate the question first. The first question is about our 3G tariff packages. He noted that we haven't update the package for quite a long time. So any plan for the company to, let's say, make a big change on those kind of 3G packages, especially when China Mobile launch 4G in the future, mainly off a very attractive data package to compete with, obviously, Unicom in the market. The second question is about the TD terminals. If the company decided to construct some trial, TD-LTE trial, what's the company stretch on the TD terminals? If you notice that China Telecom made it clear that their TD lateral will only offer a data service, so how about China Unicom?

Yimin Lu

[Chinese]

Xiaoke Zhou

First of all, let me answer first question, all right? Actually, China Unicom has been continuously reexamining our 3G packages, and [indiscernible] what we launched last year the data package for RMB 100 center [ph], and so you're going to see we try to keep pace with the market demand. And so probably in the future, when we consider to launch a bigger data package like RMB 50 for some big kind of data volume. So I think that's probably how to see Unicom hasn't stopped improving, okay, their data packages. Second point I want to say is that, you can look [ph] back at our 3G package existing right now, I think more or less probably still was quite dominant, [indiscernible] A package or B package aggregate. But in the future, maybe for some one more data site. So I think that that's the direction of our future 3G packages.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the second question, actually we just decided to start to deploy the TD-LTE trial network in China. So we haven't come up with some mature TD terminal handsets ready yet. But definitely, we're in discussing and study.

Operator

And our next question comes from the line of Steven Liu from SCB.

Steven Liu - Standard Chartered PLC, Research Division

[Chinese]

Xiaoke Zhou

Steve, the first question [Chinese]

Steven Liu - Standard Chartered PLC, Research Division

[Chinese]

Xiaoke Zhou

Okay. Let me translate the question first. The first question is about whether can management tell the difference between the ARPU for those customers, from 3G ARPU kind of customers come from outside, and the ARPU for those maybe indirect from our 2G subscriber base. The second question, he wants to know more detail about the commission goes first half this year. [Chinese]

Yimin Lu

[Chinese]

Xiaoke Zhou

For the first question, actually the company does not calculate the 3G ARPU for those customers from outside. But for those customers who upgraded from own 2G subscriber base, we did have some numbers. There are bottleneck [ph] about RMB 57, okay? So that's compared towards the average 3G ARPU bottleneck [ph] at RMB 77.6. So we can roughly know probably the level of 2G ARPU level for those customers from outside.

Steven Liu - Standard Chartered PLC, Research Division

[Chinese]

Xiaoke Zhou

[Chinese]

Zhengxin Jiang

[Chinese]

Xiaoke Zhou

Regarding the second question on commission, Mr. Jiang, Zhengxin answer this question. And we can the commission in the first half this year, actually a year ago, around 32%, okay? This goes I think mainly driven by probably 2 factors: one is that we have a very strong 3G satellite growth in the first half compared with before. Second, is that customers are divided by the third-party channels actually as a percentage of the total 3G net [ph] increase. In the first half, actually, that ratio is already around 75%.

Operator

And our next question comes from the line of Cynthia Meng from Jefferies.

Cynthia Jinhong Meng - Jefferies LLC, Research Division

[Chinese]

Xiaoke Zhou

Let me translate the question first. The first question is regarding the guidance for depreciation and amortization growth trend for this year. The second question is about the management view on TD-LTE. She wants to know on what kind of ASP the TD-LTE handset could be popular or attractive in the market.

Fu Shen Li

[Chinese]

Xiaoke Zhou

Regarding the depreciation trend, in the first half, depreciation cost are up by like 12.4%. It's a double-digit growth, mainly because the acquisition we complete for the year ended 2012. If we don't consider this an impact of acquisition, actually, the depreciation could increase by around 8.6% year-on-year in first half this year. And looking forward in second half, how this impact, the depreciation will go in a similar rate, okay, like 8% to 9% after excluding the impact of the acquisition. While this converted could be higher than the guidance we offer at the beginning, I think that part [ph] missed [ph] because these things matter because we will definitely add more new asset, new PPE can probably as those PPE has already been depreciated.

Fu Shen Li

[Chinese]

Xiaoke Zhou

On TD-LTE terminals, I think, first of all, for China Unicom, we're still seeing our TD-LTE software mainstream choice with the 4G in the future. So we pay more attention to FDD LTE terminals, and fortunately, I think it's quite mature. So for TD-LTE I think, more or less, I think terminals still left behind FDD LTE, and that's exactly the reason why in the early stage, operators try to offer Data card business first because they don't have very a lot of attractive terminal handset, TD-LTE handset offer in the market. So for China Unicom, of course, we decide to start to build some kind of TD-LTE afterwards [ph]. And well, I would say, still too early to say that what could be our strategy on TD-LTE terminals, either data cards or dangles or handset so far is too early. Or definitely we're going to decide, determining our strategy IT based on the overall market development on TD-LTE side, as well as our own business condition.

Operator

And our next question comes from the line of Donald Lu from Goldman Sachs.

[Technical Difficulty]

Currently we don't have any other questions in queue. [Operator Instructions] Our next question comes from the line of Cynthia Meng from Jefferies.

Cynthia Jinhong Meng - Jefferies LLC, Research Division

[Chinese]

Fu Shen Li

[Chinese]

Cynthia Jinhong Meng - Jefferies LLC, Research Division

[Chinese]

Fu Shen Li

[Chinese]

Cynthia Jinhong Meng - Jefferies LLC, Research Division

[Chinese]

Xiaoke Zhou

The question actually is clarify on the depreciation trend. She just wants to confirm that the 8.6% gross for depreciation is after excluding the impact of the acquisition. The answer is yes, after excluding the impact of the acquisition, the depreciation actually grow by 8.6%. And for the second half I think that goes probably more or less, around 8% to 9%, also excluding the impact of the acquisition.

Any more questions?

Operator

Yes, we'll try again the question from the line of Donald Lu from Goldman Sachs.

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Xiaoke Zhou

Let me translate the question first. He wants to know how many knows the first group of iPhone users still choose to stay with China Unicom after contract expires.

Yimin Lu

[Chinese]

Xiaoke Zhou

Because the agreement with Apple, we have never disclosed the number information regarding the iPhone users. But I can tell you is that most of those our first iPhone users still choose to stay with us. Obviously, a lot of them actually are using iPhone 5 right now. So I think they're still very important customers for China Unicom.

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Xiaoke Zhou

The second question, he wants to know the commerce [ph] interest-bearing debt actually year-on-year increased. But depending on the financial cost year-on-year decline, he wants to know the reason.

Fu Shen Li

[Chinese]

Xiaoke Zhou

I think the key factor here is that he's [ph] trying to gain new record in the first half of this year.

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Xiaoke Zhou

And the exchange gain mainly because we have convertible bond, okay? U.S. dollar-denominated convertible bond.

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Yimin Lu

[Chinese]

Xiaoke Zhou

I think, even though what happened in the second quarter this year, RMB has been reevaluate substantially and, that's the reason we record a quite number of the exchange of gains in the first half. If we look at the second half, we don't think RMB will evaluate again like what happened in the first half. So I think we may not know [ph] the record that month, that March [ph] is changing again the second half [ph].

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Xiaoke Zhou

Yes, the exchange gain in the first half we record, it's all probably RMB 700 million.

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Fu Shen Li

[Chinese]

Donald Lu - Goldman Sachs Group Inc., Research Division

[Chinese]

Fu Shen Li

[Chinese]

Xiaoke Zhou

The following question is that China Unicom have any financing [ph] plays in the second half, okay? And answer is that, I think we have probably quite a bit of cash flow that obviously can meet our financial demand, okay? And also a question on the free cash flow. He wants to know whether we can have free cash flow breakeven this year. The answer is that, definitely, we can see our free cash ratio very steady improvement, and these are ample ways where we can -- we hope that we can achieve breakeven free cash flow as long as we can. Okay. Thank you, Donald.

Anymore questions?

Operator

Yes, and our next question comes from the line of Bin Liu from Citigroup.

Bin Liu - Citigroup Inc, Research Division

[Chinese]

Xiaoke Zhou

He has 2 questions. One is on the subscriber growth trend in the second half of this year, 3G side or 2G side. And second is on the upward trend.

Yimin Lu

[Chinese]

Xiaoke Zhou

Regarding the subscriber growth on 3G side, I think -- although we think the 3G subscriber growth momentum will continue in the second half this year. So we're still quite confident about the Street [ph] how it goes in the coming quarters. But of course, we tried to focus more on the revenue side also on the growth quarter [ph] side of our 3G business. And if you look at 2G actually compare with here [ph] last year, 2G subscriber more or less maintained quite stable. And [indiscernible] the reason probably is still we have quite competitive [ph] 3G business that also help us to develop [ph] our 2G or maintain our 2G subscriber base. So I want to see this 2G subscriber growth momentum or the subscribers probably will continue or maintain in the second half of this year. On the ARPU side, on 3G, we don't expect 3G ARPU will record some big change, as probably you noticed that in next [ph] second half last year. If you look at this half year, actually second quarter's ARPU just dropped [ph] like 1.4% to 1.5% compared to the first quarter. So I think that trend probably will continue in second half this year.

Okay, I think it's time. I think we have to wrap up tonight's conference call. If you have further questions, please send us e-mail or give us a call, okay? We are willing to help you. Thank you. Good night.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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