China Unicom (Hong Kong) Limited Management Discusses 2013 Results - Earnings Call Transcript

Feb.27.14 | About: China Unicom (CHU)

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

2013 Earnings Call

February 27, 2014 5:00 am ET

Executives

Xiaoke Zhou

Xiaobing Chang - Executive Chairman, Chief Executive Officer, Member of Nomination Committee, Chairman of The Unicom Group and President of The China Telecom Corporation

Yimin Lu - President and Executive Director

FuShen Li - Chief Financial Officer and Executive Director

Zhengxin Jiang - Senior Vice President

Xiaoke Zhou

Ladies and gentlemen, and our colleagues attending the conference via video system in Shanghai, Beijing, and Shenzhen, good afternoon to you as well. Welcome to China Unicom Hong Kong Limited 2013 annual results announcement. I'm Xiaoke Zhou from the IR of China Unicom. And different from previous analysts' meeting, we have a video linking from Beijing, Shanghai, and Shenzhen and that's why we are going to have a longer session today, and the agenda is going to be slightly different as well. So after the 20 minutes presentation, we're going to, first of all, receive questions from the Hong Kong room for 30 minutes and then, the next 20 minutes for questions from other parts.

Now please allow me to present to you our management team. Mr. Chang Xiaobing, CEO and the Chairman; Mr. Lu Yimin, Executive Director and President; Mr. Li FuShen, Executive Director and CFO. I trust that they are familiar to you. And also present here are Mr. Jiang Zhengxin, our Senior Vice President who is in charge of the company's sales and marketing affairs, corporate clients and also customer service. The other is Mr. Shao Guanglu, our Senior Vice President, his responsibility is network construction operation maintenance and product innovation.

So in today's presentation, Mr. Chang, our Chairman, is going to give you the overall results for the year 2013 and also a forecast for the year 2014. And then Mr. Lu Yimin, our President, is going to share with you the operating and financial performance of the company in 2013. Now I'd like to give the floor to Chairman Chang.

Xiaobing Chang

Now firstly, I will share with you our overall results in 2013. For the year 2013, operating revenue totaled RMB 295 billion, up 18.5% year-on-year. Net profit was RMB 10.41 billion, up 46.7%. Basic EPS was RMB 0.44.

Based on the company's financial position in 2013 and taking into account the development needs of mobile broadband and fixed line broadband business, the board recommends the payment of a final dividend of RMB 0.16 per share for the year ended the 31st December, 2013.

In 2013, the company firmly grasped the opportunity for market expansion, deepened business reform and innovation and made new progress in various areas. As a result, the company achieved rapid growth in both scale and profitability. The key results highlights are as follows: firstly, fastest service revenue growth; secondly, significantly improved profitability; thirdly, greatly optimized business structure; fourthly, further enhanced network capabilities.

In 2013, the company's revenue continued to increase rapidly. Service revenue increased by 13.5% year-on-year, exceeding industry average by 4.8 percentage points in 2013 from 1.9 percentage points in 2010. The company's market share in the industry service revenue increased by 0.9 percentage points year-on-year to 21.1%. With rapid growth in revenue and continuous improvement in business structure, the company's profitability improved significantly and its financial position became more solid.

In 2013, EBITDA increased by 15.6% year-on-year to RMB 83.96 billion. Net profit increased by 46.7% year-on-year to RMB 10.41 billion. Cash flow position improved significantly. Operating cash flow increased by 11.1% year-on-year. Free cash flow turned positive to RMB 5.02 billion.

In 2013, mobile share of the company's service revenue reached 63.4%, up 3.4 percentage points year-on-year. 3G share of mobile service revenue reached 59.4%, up 12 percentage points year-on-year.

Broadband share of fixed line service revenue reached 53.2%, up 3.2 percentage points year-on-year. Non-voice share of the company's service revenue reached 56.2%, up 3.1 percentage points year-on-year.

The company further improved its anti-risk capability and enhanced the sustainable development capability. Centering on meeting market needs and enhancing investment position, the company further promoted under investment planning guidance the reform of the rolling project management of investment programs, first, to enhance investment efficiency and effectiveness. In 2013, CapEx was RMB 73.46 billion, and CapEx as percentage of service revenue decreased by 16.7 percentage points year-on-year. The company continued to strengthen the network construction with a focus on 3G, fixed line broadband and transmission network. In 2013, the company added 76,000 3G base stations and further enhanced the broadband and brought an in-depth coverage of its 3G network. The company also accelerated the construction of fiber optic network and its broadband access ports reached 190 million, of which 71% were FTTH and FTTB. The company also completed full deployment of IPRAN, laying a solid foundation to meet the load-carrying demand from LTE and other services.

Looking to the future, information and communication technology will continue to lead the global innovation trend, and 2014 is still an important development window of opportunity for China Unicom. On the one hand, the industry has shown greater potential for future development with the further implementation of a series of policies such as carrying out Broadband China strategy, stipulating our city consumption and pushing forward 4G operation. And with the emerging new technologies and businesses such as big data, cloud computing and Internet of Things, the industry possesses greater growth potential.

On the other hand, we have established the most solid foundation for future development. The construction and operation of WCDMA network has built the company's leading position in the market, laying a solid foundation for 4G development in the future.

The rich experience gained in standardization of operation, data volume operation, supply chain cooperation and e-commerce will further consolidate and expand the company's differentiated advantages in 4G era.

In 2014, the company will proactively cater to market changes, grasp the opportunities and leverage on its advantages so as to create more value for its shareholders in a rapid growth period.

Firstly, ensuring leadership in mobile broadband and maintaining the 3 leadings in terms of network, products and services and customer services with synergy between 4G and 3G networks; secondly, revenue growth exceeding industry average and achieving continuous rapid growth in mobile broadband service revenue; thirdly, profit growth exceeding service revenue growth and continuously improving corporate efficiency; fourthly, further improving CapEx effectiveness and implementing further reform on investment management to enhance CapEx effectiveness; fifthly, further enhancing operational capabilities and promoting reform and innovation at all aspects such as the integrated operation, hiring and remuneration system and front-line units, et cetera so as to enhance corporate vitality. The company is full of confidence about its overall development in 2014.

Next, Mr. Lu, our President, will review the company's operating and financial performance.

Yimin Lu

Thank you, Chairman Chang. Now let me present the company's operating and financial performance in 2013. In 2013, the company's service revenue recorded RMB 238.6 billion, up 13.5% year-on-year. 3G and broadband businesses remained key drivers of revenue growth. 3G service revenue increased by RMB 30 billion, growing total service revenue by 14.3 percentage points. And 3G has become the company's #1 revenue contributor. Broadband service revenue increased by RMB 4.4 billion, growing total service revenue by 2.1 percentage points.

Next, let me introduce the business development of the key business segments. Firstly, mobile business. In 2013, the company proactively pushed forward the integrated mobile operations resulting in rapid growth and scaled development in mobile business. Mobile subscribers increased by 17.4% year-on-year and the total mobile subscribers exceeded 280 million. Market share of mobile net adds reached 33.7%, driving market share of mobile subscribers increased by 1.2 percentage points year-on-year. Mobile service revenue increased by 19.9% year-on-year, of which 3G service revenue increased by 50.2% year-on-year and accounted for 59.4% of mobile service revenue. 3G share of mobile service revenue has been continued to increase in respect of mobile usage. Mobile MOU increased by 15.1% year-on-year, of which 50.3% was from 3G MOU. SMS usage increased by 3.8% year-on-year, of which 51.3% was from 3G SMS usage. Overall, mobile business showed a good momentum.

In 2013, the company proactively explored data-oriented cooperation model with Internet companies and to further strengthen data volume operation, the company launched data plan products such as music package plan and video package plan and also launched a trial WeChat WO Chat Card. Meanwhile, the company proactively explored the sponsored data business model and the new Internet channel marketing model. Data usage from mobile handset subscribers increased by 120.3% year-on-year to 269.8 billion MB. Monthly data usage per 3G handset subscriber continued to increase. Subscriber consumption structure continued to be optimized. The company accelerated the user migration from 2G to 3G networks and achieved good results in the 2G, 3G integrated business. As a result, both mobile subscriber mix and the mobile business structure were further optimized. In respect of mobile subscriber mix, 3G penetration rates increased by 11.7 percentage points year-on-year to 43.6%. In respect of subscriber consumption structure, both ARPU and monthly data usage of 2G and 3G integrated subscribers were higher than that of 2G subscribers. Mobile ARPU continued to increase, reaching RMB 48.2. Non-voice as percentage of mobile service revenue reached 45.6%, up 3.9 percentage points year-on-year. In 2013, the company further promoted 3G business development. Leveraging on the pooling effects of terminals, distribution channels, business integration and services, the company strengthened their differentiated operations, enhanced customized 21 M, 42 M terminals, deepened experiential marketing and cooperation with third-party channels and accelerated to the integrated 2G or 3G development so as to promote business transformation as subscribers' perception of service. Through the above mentioned 4 pooling effects, the company achieved new breakthroughs in the scaled development of 3G businesses in 2013. 3G subscribers increased by 46.14 million to 123 million, representing an increase of 60.4% year-on-year. 3G service revenue reached RMB 89.8 billion, representing an increase of 50.2% year-on-year. 3G ARPU remained at a relatively high level of RMB 75.1. While promoting the rapid 3G business growth, the company gives equal importance on both scale and efficiency and have continued to optimize 3G business model over the past year in order to meet market changes. The company proactively improved the contract policy and enriched the contract model so as to promote scaled development of contract subscribers. Focusing on mid- and high-end subscribers, the company optimized the subsidy policies and improved its efficiency of subsidy use. Excluding 3G subscribers directly migrated from the company's 2G base contract users' share, these 3G subscribers continued to increase, and subscribers with RMB 96 and above monthly packages as in 3G subscribers continue to increase. Handset subsidy as in 3G service revenue decreased to 8.7% from 10.2% last year. Fixed line business. The company promoted broadband upgrade and speed up improved broadband service capability accelerated the developments of integrated business and high-speed applications and products such as IPTV and Internet TV. Broadband service revenue reached RMB 46 billion, up 10.6% year-on-year, accounting for 53.2% of the fixed line revenue. Broadband subscribers reached 64.65 million, up 10.4%. Penetration rate of WO Family subscribers in total broadband subscribers reached 34.3%, up 5.3 percentage points year-on-year. Thanks to the growth of broadband business, the overall fixed line business service revenue grew by 3.9% to RMB 86.5 billion. The company continued to improve its core capabilities in industrial applications in the key technology areas such as Internet of Things and the cloud computing, the company increased its capabilities of application development and developing the key markets such as smart cities and small and medium-sized enterprise services. In 2013, the company signed 175 smart city contracts and its key industry application users exceeded 39 million, and the company thus increased its competitiveness in the industry application area. The reform and the transformation of telecom industry has created a lot of opportunities for the company leveraging its advantages. The company promoted innovation and transformation and developed into new business areas such as Internet of Things, cloud computing, mobile payments and mobile Internet. In 2013, the company established an incubation platform for Internet of Things and developed a 10 million Internet of Things application subscribers. We also planned 10 nationwide cloud computing centers, launched WO-Cloud brand and also, we signed some important customers including by Baidu, Alibaba and Ericsson. And we also established 3 core payment platforms, and we set up the integrated product innovation system and deepened our cooperation with OTTs products and the distribution channels. Therefore, we have accelerated the Internet-oriented products development.

Now I would like to talk about our costs and expenses. In 2013, total costs and expenses was RMB 281.3 billion, up 17.5% year-on-year, 1 percentage point lower than the operating revenue growth rate. Excluding costs of telecom products sold and adding back handset subsidy, the adjusted operating expense was RMB 223.7 billion, up 12.7% year-on-year, which was 0.8 percentage points lower than service revenue growth rate. Adjusted operating expenses as in service revenue was 97 -- 93.7%, down 0.7 percentage points year-on-year. Except selling and marketing expenses and G&A and others, the company's other major costs as in service revenue continue to increase.

More details are as follows: depreciation and amortization expense was $68.2 billion, including RMB 2.1 billion from Unicom New Horizon. D&A in service revenue decreased by 0.5 percentage points year-on-year to 28.6%. Network operation and support expense was RMB 33.7 billion. Its share in service revenue decreased by 1.4 percentage points mainly due to savings on network leasing fees from the acquisition of Unicom New Horizon. Employee benefit expense was RMB 31.8 billion, 13.3% of the service revenue, down 0.4 percentage points year-on-year. Interconnection charges amounted to RMB 20.2 billion, 8.5% of the service revenue and down by 0.4 percentage points year-on-year. In addition, we have seized the opportunity of development and accelerated our subscriber growth. Starting in the marketing expense, including handset subsidy worth RMB 50.8 billion, its share in service revenue increased by 1.7 percentage points and thanks to all those efforts, we have further consolidated our financial position. Operating cash flow amounted to RMB 78.5 billion, up 11.1% year-on-year. Free cash flow turned positive to RMB 5.02 billion, an increase of RMB 34.2 billion. Net debt to capitalization ratio was 33.9%, down 1.3 percentage points.

In 2014, the company will further implement the strategy of a mobile broadband leadership and integrated innovation. We will continue to deleverage on our comprehensive advantages on mobile broadband network, terminals, industry value chain and applications. And we will promote innovation management and to make further breakthrough in company's business developments and maximizing our shareholders' value.

Xiaobing Chang

Thank you. I would like to thank Chairman Chang and President Lu for sharing with us the results. So we now come to the Q&A session. Firstly, we will only allow maximum 2 questions for each person. We now start from the Q&A from Hong Kong.

Question-and-Answer Session

Unknown Analyst

I have 2 questions. The first one is about the CapEx budget or CapEx guidance in 2014. How much will be spent on the 4G rollout? And the second question is about the tax scheme reform, business tax to value-added tax. Could you please share with us the impact on cash flow? The profits of the company?

Xiaobing Chang

I will answer your first question and the CFO, Li, will answer the second question. In terms of the CapEx in 2014, according to our budget now, the focus of the CapEx will be used on the basic transmission network, broadband network. In addition, with our accumulations and technology progress, the budgeted CapEx in 2014 will not exceed that of 2013 because CapEx in 2013 was RMB 80 billion. But with the development of 4G, are we going to make a bigger CapEx arrangement? According to our estimation, it is not likely to be the case. In terms of the tax scheme reform, I think that you are very familiar with this topic because we have been discussing this issue for about 1 year but up to now, we haven't been informed officially by the government about the latest progress of this tax scheme reform. According to our knowledge, the fiscal and the tax departments are accelerating the development of tax scheme reform that is the transition from business tax to value-added tax and it will be -- there will be some pilot product being carried out earlier this year. And in such a process of a pilot and the trial product, there might be some differentiated tax rate. For example, for the basic telecom services, 11% of the tax rate will be implemented and for the value-added services, 6% will be the tax rate. Certainly, there will be some impact on our business development. Firstly, there will be the tax included in the price and the tax excluded in the price change. And this kind of change will influence our CapEx arrangement. And also, on our business strategy, in particular, in terms of our operation mode, our innovations and the profitability, I think, there will be some impact. But in my opinion, from the long term perspective, those impacts tends to be positive impacts. But as I said, so far, the associated policies haven't been finalized yet. So it's difficult for us to make any estimation about the impact on our financial performance. And as we know more about the policy, we will communicate more with the capital markets. Thank you.

Xiaoke Zhou

Next question?

Unknown Analyst

First of all, just ask on the employee costs which rose over 10% year-on-year. I understand there's going to be some pension provision in there. When was that taken? Was it just taken in the fourth quarter? How much was it? And what sort of trajectory can we expect on that going forward? That's the first question. And then secondly, if I can just ask on the payout ratio, the dividend payout ratio. It looks like that's below 40%. What was the thinking behind lowering the payout ratio?

[Chinese]

FuShen Li

[Chinese] With regards to your question on employee expense, in 2013, we have implemented the annuity plan or the pension plan. And we have made some arrangements for the fourth quarter. Therefore, the share of employee expense in service revenue has been changed. From the long-term perspective, I believe that the pension plan is very good to give some incentives to our employees. In terms of the exact amount, we have around about RMB 1 billion for this pension plan, and we will keep this figure in the coming years. In terms of the dividend payout, currently, I think that the company is in a very good strategic development time. Therefore, we stick to the policy of providing returns to our investors. And for the investors, they hope that we can have the fixed dividends level or bonus level or even have some higher level of dividends payout. And against the current situation of our business' development, we can strike a balance between our profitability increase and the dividends payout to our shareholders. As we are expanding our business scope in the future, we are waiting to meet the requirements and expectations of our shareholders and give more bonus and dividends to our shareholders. Thank you.

Unknown Analyst

I have 2 questions. The first one is about 4G. Just now, you mentioned that the CapEx will not exceed that of last year, based on your current judgment on the 4G rollout. So my question is can you be specific on your judgment on the 4G rollout in the market because you know your competitions have already started in planning, in launching service packages, so what is your countermeasures and what is your plan for the tariffs of 4G and the overall business development of 4G? So I want you to be more specific. And the second question is about MVNOs. I actually am confused because we know about 20 licenses have been given. Well, at the end of this year, there will be 20-something service operators emerging in the market, so what do you think will be the impact on the market or the competition landscape? Will it be positive or negative?

Xiaobing Chang

Well, President Lu just come back from Barcelona for the MWC, so I would like to ask him to answer your questions. In addition, Mr. Jiang is in charge of the MVNO business so he will give you comprehensive answers. In terms of the 4G operating strategy and the marketing strategy, we have very clearly defined strategies.

Yimin Lu

For the past few years, China Unicom has benefited from the construction of 3G network and operation. And business-wise, we have achieved a differentiated advantage. We have been saying that from 2G to 3G, it's kind of a revolutionary change. However, from 3G to 4G, it's from the mobile broadband network actually migrating to a higher access speed. However, there isn't any revolutionary change in terms of the transition from 3G to 4G. We have the following principles: we talk about integrated operation of 3G and 4G. So for the past 4 years of construction, we have over 400,000 base stations nationwide and we have up to 42MB as access speed, and we have in fact upgraded up to 42Mbps in many areas. And in terms of our basic infrastructure for 4G, it's based on the WCDMA 3G network and the way the maturity of the technology and also the issuing of the 4G licenses, China Unicom, in terms of its 4G network construction, we basically try to expand on the basis of 3G network. And for the data traffic hotspot area, we have already carried out the construction of TD-LTE base stations and also at the same time, we're trying to deploy the try-out network of FDD-LTE networks. And in terms of our network construction strategy, we have been upholding the principle of the integrated development of 3G and 4G. And for smart terminal handsets, we're talking about the combination of WCDMA plus TD-LTE plus GSM. And so with the smart handset in the future, when you have a 4G network, you can enjoy access speed of up to 100 or 150 Mb/s, and if the access speed is lower, you have 21 or 42 3G access speed. And in terms of tariff, we have uniform tariff package for these different services, and for our TD network, we got the license last year. And we have been deploying it very rapidly nationwide. And for the FDD-LTE technology, it's being tested on our WCDMA network, and we're going to launch our TD-LTE-friendly experience in 25 cities. And also, at the same time, we're going to launch a new package policy for the 4G network. And also, we are going to have a round -- route of servicing 60 cities on May 17 and then, at the end of the year, there will be around 300 cities nationwide. So we -- again, in summary, I'd say we are going to adopt a policy of integrated development of 3G and 4G so as to leverage the advantage of mobile broadband data service with the existing 3G WCDMA networks so as to provide quality experience to our users.

Zhengxin Jiang

In terms of VNO, at present, 19 licenses have been issued by MIIT, of which, China Unicom has signed operation agreements with 14 of them. So for the virtual network operators, they are going to play very significant and profound impacts or effects on the telecom industry's development. So for China Unicom, we have adopted a very positive mentality towards cooperation. And in June, some MVNOs are going to launch their service officially. And as to the kind of impact they might bring on us, so far, I think there will be mostly positive impact. In terms of service innovation and also the upgrading of services and also offering more choices to consumers and meeting more segmented markets or differentiated demands, MVNO provides more choices but obviously there will be some uncertainties because now we have so many MVNOs, there will be cut-throat price competition. Obviously in that regard, there are some uncertainties. But so far in our contact and communication with the 14 MVNOs, they are mostly looking at innovation and improvement of services to target at specific market segments and provide them with differentiated services. So we are very confident although there are some uncertainties. As to the final impact, because the MIIT defined this program as piloting, so there will be kind of a review at the end of the piloting program and also, there will be, for example, the relationship handling and also, the wholesale pricing issues are waiting to be discussed in the end. That's my answer, thank you.

Xiaobing Chang

Thank you, management. The gentleman in the first row?

Unknown Analyst

It's a follow-up question on CapEx plan. So if the overall target is RMB 80 billion, so how much of that would be allotted to 4G construction, say, the number of 4G base stations? And also for your CapEx last year, what's the share of 3G and broadband?

FuShen Li

Well, I fully understand your question. Obviously, we've already got the TD-LTE license, and obviously, we also want to get the FDD-LTE trial license as early as possible. For our strategy, obviously, we're looking towards migration to the FDD-LTE technology in the future. But obviously, we need to take advantage of the TD-LTE license at the same time. So for our investors, I ask you for your understanding and tolerance. It's not very suitable for me to disclose the size of our 4G investment on such occasions. I mean, at the end of the day, whatever we do or however much we invest, it has everything to do with the construction of the overall macroenvironment and you can rest assured that we are going to make arrangement accordingly on the basis of existing 3G network and work with both TD-LTE and FDD-LTE technologies. And in fact, we're going to carry out FDD-LTE trial in cities at a speed faster than your expectation. And in terms of CapEx, it's mostly allotted to 3 areas. So for 2013, for mobile, CapEx is 1/3 of the total; for broadband, the traffic is 24% and for the remaining, it's 33%; and then, 10% for the rest. And for this year, the arrangement will be slightly different. However, we're going to keep improving our 3G premium network. And also due to our CapEx in 3G networks in the past few years, we have built up certain advantages, also the construction cost is dropping continuously. So in the middle of -- last year, we're talking about not exceeding 1 -- RMB 10 billion additional investment. However, if the development trend is better than we expected, then there will be additional CapEx. And so far, we don't see that possibility. Thank you.

Xiaoke Zhou

The gentleman in the middle?

Unknown Analyst

I have 2 questions. Have you got guidance in terms of your 3G subscriber acquisition for this year? So you've already got 400,000 3G base stations. What's your guidance for this year?

Yimin Lu

For our 3G subscribers this year, as we're already moving into the 4G era, so in the future for our 3G and 4G's business, we're going to call them as mobile broadband users. We have quite a sizeable number of 2G subscribers, as well. So in the future, we do see a huge space for acquisition of mobile broadband subscribers, and the number will be no lower than the previous year. So this year, we are looking at an addition of 80,000 additional base stations -- 3G base stations. So for many of our 3G base stations, they are actually being constructed in preparation for our 4G network. And as Chairman Chang just mentioned, is mostly -- we are mostly building a basic transmission network. And most of our IPRAN has been developing very fast, and they will not be wasted during our 4G construction. So in terms of our investment, I think they are manageable and controllable.

Xiaoke Zhou

Thank you. Next question?

Unknown Analyst

The question is about handset subsidy. So for the year 2014, what's the share of subsidy to your revenue? How does it compare to the previous year? So considering a very fierce market competition when you launch 4G handset, will the subsidy as share of total revenue increase?

Yimin Lu

So for China Unicom's subsidy policy, there won't be any significant change because after our practice in the past few years in the market, our subsidy efficiency has been improving and has achieved very positive results. So there won't be any major change in terms of a subsidy policy, and it would be tied directly to the acquisition of subscribers. And also, our tariff policies. In -- for China Unicom, we're going to have 1-handset -- 4-modes handset and, in fact, the share of the subsidy to revenues is going to continue to drop in the future.

Xiaoke Zhou

Thank you. Next question?

Unknown Analyst

It has something to do with the handset subsidy. In terms of your sales and marketing expense to revenue, it's actually increasing. Can you give us a more detailed breakdown? So for your sales and marketing costs for this year, what's the trend?

Zhengxin Jiang

So for last year, our sales and marketing expense increased slightly. It's mostly because the development of social channels starting from 2014 in terms of budgeting and also our overall analysis, our sales and marketing expense as a percent of revenue is going to remain more or less the same as the previous year; because we have the following challenges, for example, in the 4G era, the competition is getting more and more serious and, therefore, we have to devote more efforts to our sales and marketing work and also are going to do some optimization work, for example, for different channels development. We'll look at their effectiveness, their controllability and their overall efficiency, so as to carry out a kind of adjustment, so that our social channels can be more efficient. And in addition, we'll plan to develop the online channels to be well combined with the offline channels. And in this way, we can put everything well under control.

Xiaoke Zhou

Thank you. Next question?

Unknown Analyst

[indiscernible] indefinite charges, 8.5% of service [indiscernible] in 2013. Could you tell us how much it's going to be if you apply the interconnect changes retrospectively? And could you give us some color on what we should expect this to be for 2014? Secondly, I'll come back to CapEx less of dividends. You're guiding for EBITDA growth CapEx being the same, so free cash flow is obviously going to materially increase. So should we expect dividends to also rise? Or would you want to hold it off at this point in time?

Xiaoke Zhou

[Chinese]

Zhengxin Jiang

In terms of the change of interconnection expense, since January 1 of this year, MIP has implemented the new interconnection rate plan. That means that the interconnection rate has been changed, which is a very positive sign to China Unicom. Actually, we have some hard-proven facts to say that because we have good performance in January of this year. From the long-term perspective, I think that this kind of positive impact tend to be diluted, especially the impact on our profitability.

Yimin Lu

Well, in terms of the question on dividends, as our Chairman said, we have been improving our profitability by a big margin in 2013. By now, we have the negative free cash flow, but the company's business is in an upward development trend, especially when we have the future rollout of LTE. And in terms of the dividends payout, we are trying to strike a balance of the business development and the returns to our shareholders. In the future, we will further improve our dividends payout and we hope that we can maximize the return to the shareholders.

Xiaoke Zhou

Thank you. Time for the last question from the Hong Kong meeting room. No further questions here? I would like to thank our management for answering the questions here and I now would like to hand over to the Shanghai meeting room. Do you have any questions for the management?

Unknown Analyst

I'm from [indiscernible]. I have 2 questions to Chairman Chang. According to my personal judgment, in 2014, the competition will be fiercer. And currently, the mobile subscribers has exceeded RMB 1.3 billion and the revenue tend to be -- revenue gross tend to be declined, so I wonder if you can give me some guidance about the cost, for example, the growth rate and its share in service revenue. And since you got the 3G license in 2009, China Unicom has made a lot of good progresses in your business development. We certainly hope that China Unicom can also become a blue chip company, maximizing the interest of consumers, business operators and the partners and the investors. But in the future 2 to 3 years, I wonder whether you can give me some guidance on those kind of indicators such as free cash flow, et cetera.

Xiaobing Chang

What I can say is that I partially agree with what you said just now. Considering the current business development, if we would like to further increase our revenue from the traditional services, it's very difficult, for example, the revenue from voice or short messages. But for the data traffic gross, it won't generate a lot of new opportunities for us to increase our revenue. As to the changes of subscriber base, I agree with your judgment. If we -- it's very hard for us to have the purely not -- addition of subscribers. But as we are having numerous mobile Internet applications, I think that we have some new headrooms to further develop our subscribers and also our mobile Internet businesses. And we are trying to develop the Internet-based applications, which will give us new growth points of revenue and also subscribers. And this was not clearly the same as right the beginning of this 3G business development. But as the market accepts the 3G businesses and our marketing campaign, based on our analysis of the customer and the user behaviors, we think that the data volume-oriented operation or the traffic-based operations really helped us a lot in improving the stickiness of our customers and users. And also, it helped us to go to some new areas which we cannot cover by using the traditional telecom services. And by that, I mean, we need to make our progresses and we need to adapt ourselves to the changes of the consumption behaviors in the market. And we hope that we can continue to be the mainstream player in this market.

FuShen Li

Just now, you also asked about our cost control measures. As the company is transforming itself as -- and as we are expanding our business scope, we certainly would like to improve the efficiency of resources utilization and we tend to put our cost in control. And just now, we shared with you the sales and the marketing expenses. For example, we'd like to strengthen the management of the sales channels and we would like to strengthen the management on handset subsidies in the future. The share of the sales and the marketing expenses to service revenue will keep -- will be unchanged, I should say, although, there might be a just little bit increase. And we would like to implement new measures, for example, the energy conservation measures. And also, we would like to tap the potential of the legacy network operation. And in terms of the network operation cost in the service revenue, it decreased all the time, and the growth rate of network operation and the support costs will continue to drop. And in terms of the employee expenses, the share of employee expenses to service revenue is about 12% to 13%. And as we are implementing the pension plans, I think that this level will remain unchanged or maybe, it will drop a little bit because the company tend to have very strict control of all of those kind of expenses. And based on the above-mentioned arrangement, in terms of the future EBITDA growth and the operating cash flow growth, I think that they will be in line with our revenue growth, and the EBITDA margin will be stable and it will be moderately increased. And that is our consideration about those indicators.

Xiaoke Zhou

Thank you. We now would like to hand over to Beijing. Do you have any questions there?

Unknown Analyst

I have 2 questions. The first one is about VoLTE. China Mobile launched its white paper on next-generation mobile communications, and it seems that VoLTE will be a trend for this industry in the future, and the operators tend to welcome this kind of business. And I wonder whether the management can share with me your ideas about VoLTE. The second question is about the Internet business. China Unicom has set up the investment company, and that means that you have started in making investment in Internet businesses. And the regulators tend to have a loose environment, allowing the hybrid operation, for example, China Telecom also had the instant messaging services and applications being launched. So for China Unicom, my question is, are you going to have more flexible businesses? Or do you -- are you going to have the flexible mode of business operation in the future?

Yimin Lu

Well, in terms of VoLTE and the new way of providing information service, we actually call it Rich Communication services. From the perspective of users, these are not revolutionary services. VoLTE is a technology standard. To be specific, we used to have the voice telecommunications network. And even for the WCDMA, it can transmit the voice, the signals. When we come to the LTE network, the voice functions cannot be carried there. Therefore, in order to carry the voice communications, you need to have the VoLTE technologies. But for the users, there is no changes. For them, they can still enjoy voice communications over the LTE network. And for the operators, VoLTE technology is not yet matured and besides, for China Unicom, we have a well-established WCDMA network, which carries voice communications in a very good way. So for China Unicom, our technology of -- the technology that we adopted is a voice fallback technology and because we have synergy from both 3G and the 4G networks. And in terms of the VoLTE technology, it has no significant or material impact on us. But as the technology is progressing, the voice cost of VoLTE will be much more matured, then we can also consider the possibility of deploying the VoLTE on our network. But for the users or subscribers, they cannot see any of the technical difference, and the service mode will remain unchanged. For RCS and for China Unicom, we started to deploy RCS 3 years back in our piloting project. So it's basically based on our traditional SMS, and we -- for our traditional SMS service, we add pictures, voice and other chatting services. But in terms of the global operators' technology deployment and standards, we're more or less the same. And I don't think we can compete with the OTT operators at the moment. So in terms of business model, to be honest, we haven't been able to find a good way to compete with the IMS offered by OTT operators. So if we look outside the cost and also operating efficiency, we really need to improve.

Xiaobing Chang

As for your second question, I know that in the third session of the 18th CPC Congress, we talked about the deepening reform, economic reform and allowing the market to allocate resources and encouraging the SOEs to deepen their reform. So after the Party Congress, we have hybrid ownership of the enterprise or business. And after the Party Congress, we have tried to study this concept, and I think considered the possible changes and opportunities as a result of this hybrid ownership system. So for the private sector, they are also trying to think about this. So I think for the whole economy, we are being led by this reform, and we're all thinking how to better operate our assets and improve our operating efficiency and, also, how to make the innovation smoother. So in this general background, China Unicom has every reason to believe that we have the opportunity to transform and change ourselves. So for certain innovative fields, we have our expertise and specialty, and also, there are areas we're not good at or are doing poorly, more poorly than others. So in those areas, we can resort to the invisible hands of the market, a source to better allocate resources. And in that, I'm actually saying that anything that is allowable under existing legislation and the policy is a possible option for China Unicom, and we're ready to try and experiment with them and we're trying to seek some breakthroughs in those areas.

Xiaoke Zhou

Do we have any more questions from Beijing?

Unknown Analyst

I have one question for you. It's about terminal handset subsidy. So at present, most subsidy goes to individuals, but can we give the subsidy to some auto manufacturer like BRT or SAIC? So they can actually embed your solution or service to their car or vehicle? Why is it not -- how is that you are not doing that at the moment? Do you think it's feasible? And what's your thinking in that regard?

Yimin Lu

Well, maybe you don't know that we have been working with the auto manufacturers. So for BMW, all their vehicles' back-end support is actually being offered by China Unicom. But when you say that handset subsidy is tied to the revenue contribution, so for our cooperation with the auto manufacturers, their contribution to our revenue is very small. It's mostly from data traffic. And as you have mentioned, we are not only working with auto manufacturers, but also other industry for possible application. For example, tomorrow -- in the near future, we're going to talk to, for example, Gree Air Conditioner and other brands. So in terms of policies and subsidy, we are ready, but before we make that decision to provide subsidy, we need to do some proper accounting so as to tie the subsidy to contribution to our revenue.

Xiaobing Chang

In terms of the IoT applications, as they are becoming increasingly familiar to the users, we need to make some -- a preparation in advance. And obviously, what you have just asked in your question is a scenario we have already thought about, and we are ready to play a part.

Xiaoke Zhou

Now we're going to switch to Shenzhen to see if we have any questions from Shenzhen. Any questions from Shenzhen?

Unknown Analyst

Two questions. First question is from MVNO. Just now, you've already given out some guidance. So for the 14 MVNO who have already signed a cooperation agreement with China Unicom, will you work with them? How is the pricing strategy? If they offer same service as China Unicom, are they going to price their services individually? Or are they going to price their service jointly? If there is a differentiated service, how is it going to be priced?

Xiaoke Zhou

Sorry, we could not hear you very clearly. Can you speak through the microphone?

Unknown Analyst

Apology. My first question is about MVNO. So for the 14 MVNOs, in terms of existing tariff packages -- pricing, do we allow them to price their own service package individually? If they offer some differentiated service package from China Unicom, do they -- do China Unicom give them autonomy? Or do China Unicom also regulate their pricing of a differentiated service package? And also, it's about remuneration for senior management. We understand that due to increased higher remuneration packages, a certain senior management team member is thinking of leaving China Unicom. What's your thinking in that area? Is it because your compensation is not attractive enough? The next is about your revenue and expenses.

Xiaoke Zhou

Sorry. We could not hear you very clearly. Could you -- so, okay. Maybe we'll answer your first question first. It's a very broad question. We'll try to answer your first question first.

Zhengxin Jiang

So we have carried out a cooperation with MVNO in terms of pricing strategy or rules. For traffic and voice, they are sold on the wholesale basis to the MVNO and for the tariff package, they are in a position to set the pricing themselves. So this makes us different from our competition in the industry. Why do we do that? Because in selecting the cooperative partners, we mostly look at the innovation capacity and service capability of the potential partners, especially the ability to achieve innovation and the high service level in a segmented market or a particular market segment. We are worried that the certain potential partners may not be able to meet the specific market segment demand, that's why we wholesale the voice and the data to them.

Yimin Lu

Another point here is that for China Unicom, we have a 1-single point access and 1-single point settlement at the headquarters. So for the subsidiaries or the provincial -- provinces, they're not in a position to do that with our MVNO partners.

Xiaobing Chang

For your second question, I'll try to explore it with you. You have noticed that MVNOs also need to build their teams prior to their entry into the market. And obviously, they need to get a headcount from companies in the industry. Just imagine, now we have a new security company or a new future company being set up. Where do they get their human resources? Obviously, they are thinking of a headhunt from their competition or the industry. So I think in the future, there will be more free flow of high-caliber personnel in the labor markets. And I think in doing so, we can better recognize the value of the capacity -- the capability of high-caliber individuals. And I don't think there's anything surprising. And for China Unicom, obviously, we feel sorry when certain high-caliber senior management members leave us. However, we also understand that they need to pursue their career and also they need to consider their personal interest, so that's why they choose to leave us and embrace challenge in the field. So we have hundreds of thousands of staff members at China Unicom. And in the recent years, we have tried to carry out a succession-building, so as to install in place a much younger succession team, and we want to speed up the development process of the management team. And so there will be people coming in and going, but it's going to stabilize in the end. So it's a matter, of course, and that's my take on the issue. As for what I have said just now, it's -- is to try to address certain challenges facing the SOEs. Obviously, we need to look at the macro environment, macro system, and maybe we can learn from others, so as to improve our work in this regard.

Xiaoke Zhou

In the interest of time, we are going to wrap up today's meeting. We thank our management members and we thank our analysts and investors for joining us here today. If you have further questions, feel free to contact our IR team here in Hong Kong and also in Beijing. Thank you.

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