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China Telecom Corporation (NYSE:CHA)

Q4 2013 Earnings Call

March 19, 2014 12:30 AM ET

Executives

Wang Xiaochu – Chairman and CEO

Yang Jie – President and COO

Madam Wu Andi – EVP and CFO

Operator

Ladies and gentlemen, good afternoon I am Lisa with Investor Relations Department of China Telecom. Here on behalf of the company, I would like to welcome everyone to our 2013 year end result presentation. This presentation will be conducted in Chinese with simultaneous interpretation. The Q&A session will be hosted by a moderator and provided with consecutive interpretation. Please be reminded to switch your mobile phone off or set it to vibration mode.

First of all, I would like to introduce our management present today, Mr. Wang Xiaochu, Chairman and CEO; Mr. Yang Jie, President and COO; Madam Wu Andi, 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 2013.

Wang Xiaochu

[Interpreted]

Good afternoon, ladies and gentlemen. I am very pleased to meet you all again and to introduce the company’s performance in 2013. Today’s presentation will be divided into three 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 review and financial performance respectively. The highlights of the company’s major developments in 2013 are as follows: Good progress on corporate development, revenue structure continued to improve, revenue and net profit growth attained double-digit growth. Mobile business maintained scale expansion, customer value and scale benefit enhanced steadily.

Completed the intensive phase of fiber network upgrade in cities as scheduled, which facilitated a continuous growth in broadband and our long-term competitiveness. To deploy network appropriately with regard to the government policy and business development building a high speed and nationwide integrated 4G, 3G networks to increase operating returns.

Finally, to create external opportunity and deepen comprehensive reforms striving to create a new China Telecom.

2013 saw an encouraging trend in revenue and profit growth fueled with double-digit increase. Operating revenue reached RMB321 billion, up 13.6%, operating revenue excluding mobile terminal sales was RMB284.1 billion, up 10%.

EBITDA and EBITDA margin improved significantly due to substantial savings on mobile network leasing fee during the year after the company bought CDMA assets from the parent company at the end of 2012. EBITDA came to RMB96.6 billion, up 36.2%. EBITDA margins stood at 34%, up 6.6 PP.

Net profit was RMB17.5 billion, up 17.4%. In 2013, the company continued to deepen strategic transformation and improved its revenue structure with growing momentum. The revenue share from high growth businesses rose properly to 88% leading to a double-digit growth in revenue, higher than the industry average and the GDP growth.

The company actively promoted scale expansion of mobile service which has become the key revenue driver accounted for mainly a half of our operating revenue.

In 2013, our CapEx was RMB80 billion, of which RMB29.4 billion was invested in mobile network and RMB50.6 billion in broadband, internet and others.

In 2013, we completed the intensive phase of fiber network upgrade in cities as scheduled for three years, while increasing this investment in the mobile and commencing the deployment of LTE network in hotspots in light of 3G business developments and issue of 4G license.

In 2014, CapEx budgeted for mobile and wireline will be RMB42.3 billion and RMB38 billion respectively. For mobile, we will deploy 4G network appropriately in accordance with government policy and business development.

For our wireline operation, we are mainly investing in carrying networks broadband assets, network capability enhancement for intensive network and integrated information services. At the end of last year, MIIT issued 4G licenses. We are deploying one hybrid LTE network of integrated result strategy to increase investment return and operational efficiency.

The company has started rolling out 4G services in nearly 100 major cities in mid-February 2014 with the first batch of 4G data device compatible with TD LTE standards.

The company is applying for the FDD trial license and at the same time focusing on expanding the width and depth of network coverage in key cities to create a high quality network and accelerating e-Surfing handset value chain development to assure superior 4G handset service experience and investment return.

Dividend is your concern. The Board of Directors recommend to increase the dividend for 2013 to 9.5 Hong Kong cents per share, up 11.8%. With regards to shareholders’ return, cash flow and capital requirement for future developments.

The company firmly wants the deepening reform to further increase its efficiency and return in two aspects. In fundamental businesses, we will carry our market-oriented reform from bottom up with the implementation of sub-division of performance evaluation units and the promotion of bidding with performance contractors to stimulate staff vitality.

For emerging businesses, we will fully implement market-oriented reform by open co-operation and leverage complementary resources with partners, while devising and perfecting segregating operator system. We plan to promote shareholding for staff and establish market-oriented management incentive and control system to enhance competitiveness.

Through this means we continue to perfect the compensation mechanism, increase employees vitality and corporate efficiency while continuing to create incremental business value to be shared by our shareholders and staffs.

Looking ahead, we see a bright future. China see explosive growth momentum in the mobile internet market with new rooms for development by the issue of 4G licenses and the advance of information services such as cloud computing, big data and internet finance.

We will grab the opportunity and accelerate the development while striving in the five years to raise the share of revenue from emerging businesses such as data traffic, internet applications and ICT service from approximately a quarter now to around a half and to shift a new China Telecom start continue to create new value for our shareholders.

So much from our presentation now Mr. Yang Jie will give you our business review.

Yang Jie

[Interpreted]

Thanks, Chairman, Wang. Ladies and gentlemen, good afternoon. Now may I present to you the business performance in 2013. The table shows the revenue breakdown and the changes and I shall give you the specifics.

First, mobile. In 2013, taking full advantage of our quality 3G network and services, we rapidly expanded mobile scale while data service operation effectively enhanced customer value.

Mobile service revenue reached RMB113.8 billion, up 22.6% achieving industry-leading revenue growth. Net addition of over 34 million 3G subs with total 3G subs over 100 million; total mobile subs reached 186 million.

Mobile ARPU was RMB54.8, up 1.7% while 3G ARPU remain steady at RMB71.5. Develop data traffic operating strategy via terminal-led and applications-driven approaches resulting in a rapid growth in mobile data traffic and revenue.

In 2013, 3G handset internet access revenue RMB22.9 billion, up 88%, average data traffic per 3G handset sub was 180 Meg, up 42%. 3G handset internet access ARPU was RMB23.7.

In 2014, our key initiatives are on two aspects. In the rural areas, we will accelerate our development by actively promoting low-end smartphones like RMB299 smartphone, fully leveraging our 3G network advantages.

In city areas, we will provide super fast and high-quality 3G, 4G integrated services with reasonable packages designed that will raise the data traffic and revenue while leveraging consumer concern on the usage.

Let’s look at the fixed line business. In 2013, our wireline had a solid performance. Revenue reached RMB170.4 billion, up 3.1% actively leveraged the fiber network and ICT service edges.

We accelerated the development of wireline broadband as an integrated information service and other high growth services; effectively offsetting decline in wireline was revenues.

At the same time we continued to strengthen the wireline mobile ICT services and packages to promote bundling synergies. In addition, the contribution of wireline voice revenues continued to decline, so did our operating risks.

On wireline broadband, we managed to maintain good growth despite increasing competition. Thanks to our strength in network and service. Wireline broadband revenue reached RMB70.8 billion, up 6.1%. Total sub surpassed 100 million.

In the future, we will integrate with our highest speed 4G, 3G networks for synergies providing customers with a stable reliable, high-quality cost-effective and complete wireline and wireless highest speed broadband services.

In 2013, the company actively expanded wireline VAS and integrated information services focusing on key services such as ICT, IDC and ITV that enhanced the cloud calling with wireline broadband service.

Revenue from wireline VAS and integrated information services reached RMB34.3 billion, up 11.6%. ICT, IDC and ITV service revenue jumped 20%, 32% and 61% respectively, becoming the drivers of our incremental revenue.

In 2013, we stepped up assets in innovation and collaboration. Initially forming China Telecom internet business model from portal building business class sub in integrated platforms.

First, we actively explored from cooperation. While it’s over six months YiChat had close to 60 million users, fast becoming our important mobile internet business portal.

Second three business groups, digital entertainment, e-commerce and information services were initially formed. Best Pay achieved a new flow with transactions value of more than RMB130 billion.

Through continuous strength and capability in unified account and location-based service, we accelerated the process of connecting and further opening to increasingly mature integrated platform as a one-stop shop for development of operation and marketing.

After years of continued strategic transformation, the company has acquired prominent and differentiated advantages. Adhering to the telecom market orientation and differentiation and three new growth, the company developed strong operating advantages driven by our clear and effective strategies and strong execution.

And excellent full-service integrated operations capability together with the leading ICT services and innovative services mindset constitute our leading edges. We also created a leading network leveraging the super fast integrated wireline and wireless access network as well as the leading IP-based comprehensive fibre back-haul.

The company’s core competence was further enhanced with these differentiated advantages.

In 2014, we will firmly stress the three key things, reform and innovation, open cooperation, quality and efficiency enhancement to further change the model of corporate development, refine customer acquisition strategy and large platform to create value and establish internet-business type operation model.

In order to accelerate the development of scale stimulator corporate vibrancy and enhance the efficiency in return.

Now we turn to Madam Wu Andi, our CFO for introducing our financial performance.

Madam Wu Andi

Thank you, Mr. Yang. Good afternoon ladies and gentlemen. Let me introduce the company’s financial performance of 2013. In 2013, our operating revenue was RMB321.6 billion, up 13.6%, operating expenses were RMB284.1 billion, up 12.3%. Net profit was RMB17.5 billion, up 17.4%.

In 2013, while accelerating expansion, we managed to strengthen cost control and improve operating efficiency. The company’s operating expenses were RMB294.1 billion or 91.5% of revenue, down 1 PP.

The key movements are as follows: D&A was 21.5% of revenue, up 4 PP, mainly due to assuming depreciation and amortization of mobile network subsequent to the CDMA network acquisition at the end of last year.

Network operating cost accounted was 16.5% of revenue, down 6.8 PP, mainly benefited from the substantial savings of mobile network leasing fee as a result of the CDMA network acquisition.

SG&A accounted for 21.9% of revenue, down 0.4 PP, while the total amount was up 11.6%, mainly due to appropriate increase in sales initiatives to promote business scale expansion.

Cost of mobile terminals sold and other accounted for 12.1% of revenue, up 2.8 PP mainly because the company increased the procurement and sales of star smartphone at a differentiate price levels.

In 2013, the company’s CapEx was RMB80 billion as resources continue to work to high growth and high-value business areas.

In terms of CapEx structure, emphasis was still on broadband and internet as well as mobile network, which include the completion of intensive phase of fibre network upgrade in cities in 2011 to 2013 as well as further optimizing of 3G network in timely and appropriately deployment of 4G network.

Our financial strength remains healthy with a solid capital structure and in 2013 the company’s debt-to-capital ratio was 28.3% and net debt-to-EBITDA ratio was 0.95.

The fundamental remains on effectively supporting the sustainable corporate development. In future, the company will further strengthen financial management and improve efficiency.

The following is the key initiative; further enhance the systemic three-in-one alignment of budgeting resources allocation and performance evaluations based on market dynamics.

Further implement sub-dividing performance evaluation units and highly unified responsibility, authority and compensation.

Third, actively explore financial structure and mechanism to facilitate entry of private capital.

Fourth, innovate financial management and systems to support strong growth of emerging businesses.

Fifth, strengthen capital and asset management to enhance resources utilization. Through these measures, the company strives to maximize corporate shareholders and customer values.

This is the end of our presentation. Thank you.

Question-and-Answer Session

[No formal Q&A for this event]

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