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China Telecom (NYSE:CHA)

H1 2013 Earnings Call

August 21, 2013 2:00 am ET

Executives

Lisa Lai

Xiao Chu J. Wang - Chairman of the Board, Chief Executive Officer, General Manager, Chairman of China Telecom for HK and General Manager of China Telecom for HK

Jie Yang - President, Chief Operating Officer and Executive Director

An Di Wu - Chief Financial Officer, Executive Vice President and Executive Director

Lisa Lai

Ladies and gentlemen, good afternoon. I'm Lisa with Investor Relations Department of China Telecom Corporation Limited. Here, on behalf of the company, I would like to welcome everyone to our 2013 Interim Result Presentation. This presentation will be conducted in Chinese with simultaneous interpretation. The Q&A session will be hosted by a moderator and over with consecutive interpretation. Please be reminded to turn your mobile phone off.

First of all, I would like to introduce our management present today: Mr. Wang Xiao Chu, Chairman and CEO; Mr. Yang Jie, President and COO; and Madam Wu An Di, Executive Vice President and CFO.

Thank you for joining us today. I hope the presentation will be helpful to you. Now let's welcome our Chairman Wang to present the company's performance in the first half of this year.

Xiao Chu J. Wang

Good afternoon, ladies and gentlemen. I'm very pleased to meet you all and to introduce the company's performance during the first half of 2013. Today's presentation will be divided into 3 sections. First, I will talk about the company's overall performance. This will be followed by President Yang and Madam Wu, who will present our business overview and financial performance, respectively.

In the first half of 2013, the company's achievement are highlighted as follows: Our robust business development optimized the revenue structure and drive double-digit growth, both in revenue and net profit; Our mobile scale expansion led to industry-leading mobile service revenue with customer value steadily enhanced; We further reinforced edges in fiber broadband network and services to boost continuous broadband growth leading to strong long-term competitiveness; Last, we will deploy LTE trial network in a timely and appropriate manner.

In the first half this year, the company maintained a sound momentum with double-digit growth in both revenue and net profit. Our operating revenue were RMB 158 billion, up 14% year-over-year. Excluding revenue from mobile terminal sales, operating revenues were RMB 139 billion, up 10%. EBITDA and EBITDA margin posted a significant growth as a result of substantial saving of mobile network capacity lease fee upon completion of CDMA network acquisition from the parent at the end of last year. In the first half of 2013, EBITDA was RMB 50 billion, up 35.5%; EBITDA margin of 36%, up 6.8 percentage points; and net profit of RMB 10.2 billion, up 16% year-over-year. We are confident to sustain the sound growth momentum in the second half year.

In the first half of 2013, we further improved our revenue structure through continuous strategic transformation. The revenue mix from the growth business significantly increased to over 87%, supporting to a double-digit growth in operating revenues, which outpaced the industry average. We actively promote mobile scale development, making mobile service the key growth driver. The operating risk of the company was further alleviated, as the proportion of the wireline voice revenue further declined to 13%.

In the first half, our mobile service saw a rapid growth, and mobile revenue growth was leading in the industry. We achieved a rapid growth in mobile subscriber scale, leveraging our premium 3G network, equipped with warranty of smartphone and the growing wealth of mobile Internet applications.

Our 3G subscribers base reached over 87 million, representing a net add of 18.3 million in the first half of this year. Thanks to the surging 3G subs scale, the number of our total mobile subs increased rapidly to 175 million.

Through the first half, we promoted data traffic operation and achieved the satisfactory results. With mobile data services, customer experience and value were effectively enhanced. The mobile ARPU further increased to RMB 54.3 million, up 3.6%.

In the first half, our CapEx was RMB 33 billion, representing approximately 44% of the full year budget. Our resource allocation continued to tilt towards high-growth and high-return business and area. We pushed forward the investment in fiber broadband business and enhanced the 3G network coverage and quality, aiming to sharpen the network strength to support our rapid business expansion.

Meanwhile, we'll capture the opportunity to deploy LTE trial network in a timely and appropriate manner. Such deployment will not constitute material impact on our CapEx budget in 2013 with an effort to rationalize the investment mix for wireline and mobile network. Our CapEx in 2013 could increase by around RMB 5 billion, making the full year budget to reach RMB 80 billion.

To support national technology innovation and allow flexible use of spectrum resources to meet customer demand, we plan to deploy one hybrid LTE network of integrated resources, sharing the core network with wireless access through both TDD and FDD. Thus, most of the LTE network investment would support both TD and FDD services, offering us flexibility in long-term development and return enhancement. We will continue to fully leverage existing nationwide superior 3G and fiber network to serve our customers. LTE deployment would only start from densely populated areas. We plan to flexibly deploy LTE network with regard to future LTE licensing, data business growth and value chain development, overlaying on existing superior 3G network for long-term integrated operation to enhance customer experience and return.

Looking forward, we are positioned to benefit from the vast potential arising from the increasing popularity of smartphones, mobile Internet applications and accelerations of industrialization and informatizations.

To better profit from the opportunities in mobile Internet, we will strive to break away from the constraint of traditional telecom operation mindset, leveraging market-oriented mechanism to motivate our staff and differentiate offering to enhance competitiveness. While stepping up scale development of our core businesses, including mobile, broadband and industry application, we will expedite our emerging businesses to achieve new backflow in scale development in pursuit of customer and corporate value enhancement.

Now, let's invite President Yang Jie to introduce our business development.

Jie Yang

Thanks, Chairman Wang. Good afternoon, ladies and gentlemen. I'm going to introduce our business performance in the first half this year. This table shows our revenue breakdown and the changes. And I'm going to further elaborate going forward.

Running under 3G migration, we rapidly expand the scale of 3G subs in the first half, leading to a strong growth in mobile subs. At the same time, the mobile ARPU continued to improve as a result of the substantial increase to the mix of 3G subs with higher ARPU, and the ARPU was RMB 54.3 million. We put forth mobile scale development on the back of smart terminals, mobile applications and China expansion. Smart terminal have become increasingly popular with improving client's performance factor. There are approximately 600 models of smartphones available in the market with the sale volume of approximately 30 million units in the first half 2013, up 83%.

The informatization application effectively contributed more than 40% of mobile net adds. Meanwhile, we promoted store management accountability mechanism for self-owned outlets while pushing ahead with the collaboration with open channel, as well as the effectively centralized operation of e-channel.

The company further promote data traffic operation to facilitate rapid growth of mobile data business. The mobile data revenue for the first half was RMB 26 billion, up 36%, becoming a key revenue driver. We took a few key initiative to promote data traffic growth, including introducing innovative mobile data products, strengthening coaching in target market on 3G applications and accelerated development of self-operated mobile Internet businesses while leveraging our open platform and close collaboration with mobile Internet partners. With the gradual establishment of data consumption habit, the monthly average data traffic for 3G handset subscriber increased by further 51% to 168 MB in the first half of the year. Revenue from mobile handset Internet asset almost doubled to around RMB 10 billion.

In the first half, we effectively uplifted the weight of revenue from wireline data and others through continuous strategic transformation, driving revenue from wireline service steadily rising to RMB 85 billion. With the strong fiber network and ICT service stream, we accelerated development of our growth businesses, namely wireline broadband, VAS and integrated information services, which effectively offset the decline of wireline voice revenue. We also successfully alleviated the decline of wireline voice revenue through the integrated packages offerings. The operating risk was effectively alleviated [ph], as the proportion of the wireline voice revenue further reduced.

Our wireline broadband revenue maintained a robust growth amid mounting competition. In the first half, wireline broadband revenue increased 5.5% to RMB 55 billion (sic) [RMB 35 billion]. To response to key competition in the broadband market, we flexibly adjusted the tariff to enhance the competitiveness and further penetrate into the rural area, leading to some pressure on broadband ARPU. On the other hand, we capitalized on our strong fiber network and service to expedite bandwidth upgrade. Hence, we've managed to maintain moderate ARPU decline with user experience and satisfaction improved.

We are here to approach a rational competition and profitable scale development through our wireline broadband service. In the first half of this year, we -- the wireline broadband subs reached 96 million, representing a net increase of 5.7 million. We expect a net add of wireline broadband sub to exceed 10 million for the whole year.

The comprehensively proliferated VAS and integrated information service were set to nurture new growth engine and pull the core business growth. In the first half, wireline VAS and integrated information services maintained steady growth and saw revenue of RMB 16.7 billion, up 2.1%. In particular, revenue from our strong whole IDC business increased by 25.7% to RMB 3.7 billion.

For cloud computing and IDC, we efficiently centralized the development. We've further enhanced the open service capability of cloud platforms and expand cloud VAS with 6 cloud data centers in play. We consolidated the IDC resources and unified tariff to strengthen the edge and optimize the product and application to drive rapid growth of data revenue.

In the first half of 2013, the solid execution of our strategies -- strategic transformation resulted in strong business performance. In the second half, we will further promote profitable scale development, leveraging the dual-leadership in innovation and service with a focus on the 4 aspects.

We will accelerate the concerted integration of operation and scale expansion of 3 core services: mobile wireline, broadband and informatization application. We'll promote market oriented -- we'll accelerate the concerted integrated operation and scale expansion of 3 core services. Four, we further boost the capability of innovation service, efficiently centralized the management and operation to improve sustainable competitiveness -- competitive edge and enhance operating efficiency and return.

Now let let's invite Madam Wu, our CFO, to present the financial performance.

An Di Wu

Thank you, President Yang. Good afternoon, ladies and gentlemen. I will present the financial performance for the first half this year. In the first half of 2013, our operating revenues were RMB 157.5 billion, representing a sound increase of 14%. Operating expense were RMB 142 billion, up 13%; and net profit was RMB 10.2 billion, up 15.9%. The acquisition of CDMA Network from the parent at the end of last year resulted in the substantial saving of mobile network capacity lease fee this year. In the first half of 2013, the company free cash flow increased by 62% to RMB 13.8 billion.

To capture the opportunity for scale development, we exercised a stringent cost control and optimized resource allocation to enhance operational efficiency in the first half of this year. The operating expenses were RMB 142 billion, accounting for 90% of revenue, a decrease of 0.8 pp year-on-year. The major movement include depreciation and amortization increased by 4.2 pp to 22% of revenues, mainly due to assuming the depreciation and amortization expenses of the mobile network subsequent to CDMA network acquisition at the end of last year.

Network operation and support expenses decreased significantly by 7.9 pp to 14.8% of revenues, mainly attributable to the substantial saving of mobile network capacity lease fee as a result of CDMA network acquisition. SG&A expenses increased by 1 pp to 22.2% of revenues, mainly due to the increase in sales initiative full-scale expansion of 3G and broadband services. Other operating expenses increased by 3.2 pp to 70% of revenues, mainly attributable to the increase of 61% in course of mobile terminal sold as a result of an increase in procurement of smart terminals.

In the first half of 2013, our CapEx was RMB 33 billion, and the investment was tilted towards high-growth, high-value business and areas. The CapEx structure in the first half of 2013 was similar to that in the first half of last year. We will further implement Broadband China, Fiber Cities project to reinforce our broadband network leadership and core competence. We expect to basically complete the general coverage in cities in Southern China with 20 megabit per second and above customer access bandwidth by the end of this year, making investment in broadband and Internet taking 53% of total CapEx. To further improve 3G coverage and quality, our mobile investment will focus on network optimizations and capacity expansion in high data traffic area by investing 33% of total CapEx into mobile network.

We acquired CDMA network at the end of 2012 through the financing. Taking the opportunity, we appropriately geared up and optimized the capital structure to enhance corporate value. In the first half 2013, our total debt to total capitalization ratio was around 30%, and net debt-to-EBITDA ratio was 0.95x. The financial position of the company remains sound and healthy, providing effective support and assurance for sustainable development.

While driving profitable scale development, we are to deepen financial transformation mainly through implementing market share gain and value creation-based resources allocation system; optimizing cost and investment structure with resources tilting toward key businesses, high-value customers to enhance return; timely refining performance evaluation metrics of both long-term and short-term to foster motivations; strengthening centralized capital management and activating asset utilization to improve capital asset return; fifth, strengthening market-driven mechanism with comprehensive promotion of subdividing performance evaluation unit. We're committed to the maximization of corporate customer shareholder value through the above measure. This is the end of our presentation.

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