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Chunghwa Telecom Co., Ltd (NYSE:CHT)

Q2 2011 Earnings Call

August 26, 2011 6:00 AM ET

Executives

Fu-fu Shen – Director, IR

Shyue-Ching Lu – Chairman and CEO

Yeh Shu – CFO

Shaio-Tung Chang – President

Analysts

Danny Chu – Nomura

Ken Goh – GIC

Shed (ph) – Credit Suisse

Joseph Quinn – Macquarie

Steve Liu – SCB

Gary Yu – Morgan Stanley

Lucy Lee – JP Morgan

Operator

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company’s First Half 2011 Operating Result. During the presentation all lines will be on listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question-and-answer section.

For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.cht.com.tw/ir under the Infocus section.

Now, I would like to turn the call over to Fu-fu Shen, the Director of Investor Relations. Thank you, Ms. Shen, please go ahead.

Fu-fu Shen

Thank you. This is Fu-fu Shen, Investor Relations Director of Chunghwa Telecom. Welcome to our second quarter 2011 results conference call. Joining me on the call today are Dr. Lu, Chairman and CEO; Mr. Chang, President; and Dr. Yeh, CFO.

During today’s call management will discuss business operational and financial highlights for the second quarter 2011. This will be followed by Q&A. Before we continue, please note our Safe Harbor statement on slide two.

Now, I would like to turn the call over to Chairman, Lu.

Shyue-Ching Lu

Thank you, Fu-fu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first half and the second quarter 2011 earnings results conference call. On slide number three, total consolidated revenue for the second quarter of 2011 amounted to NT$54.4 billion, mainly from the increase of the fixed line revenue, mobile Evaluative service under handset sales.

In addition, an increase of construction in revenue from our property development subsidiary, also contributed to the revenue growth. During the second quarter 2010, we continued to enjoy growth in our traditional telecom service business and to win additional measure ICT contracts.

Moving on to slide number four, which shows our cash return over the last several years. In addition to NT$18.4 billion cash returned we kept all reduction in January. On August 17, we distributed a dividend to share of NT$5.5243 amounting to a total of NT$42.9 billion dividend to our year 2010.

Our continued commitment to shareholders is evidenced by our decision to distribute the highly dividend payout ratio of 19%, reason of many 10% set aside as De-gold (ph) in accordance with company law. However, once our De-Reserve (ph) reaches our (inaudible) which is expected to occur in three or four years. We’ll be exempted from this due chromed. As a result, the dividend payout ratio of over 90% is likely in three or four years.

Before beginning the financial overview for the second quarter, I would like to take you through some recent developments as shown on the following three slides.

Slide number six, innovative offering and the premium customer service are key elements of Chunghwa’s corporate culture. We have taken the decision to leverage this strength to further differentiate ourselves from our peers. We have therefore announced our Digital Rainforest initiative to offer a cutting edge broadband service to address customer’s desire or even higher speeds, the cloud computing platform to a cattish innovation.

In regard to the service platforms for up and (inaudible) to develop Garmin (ph) applications, under a strong pace. And so whereas corporations with vendors and international operators, on carbon emission reduction to promote sustainability. In order to provide superior customer service, we are innovating our service channels under audits to offer an enhanced user experience. We anticipate that these efforts in which the growing of the industry and the result in win-win situation for Chunghwa is part of news under customers.

Slide number seven, we illustrate our cloud computing business. Our cloud computing service, one of our new businesses, that has attracted considerable attention. This B to B to C initiative involves Chunghwa and its partners working together to offer a developing platform, hicloud PaaS or independence of their vendors to develop Cloud applications that are then provided to customers in the hicloud X small.

We’re also collaborating with governmental communication entities and the independence of their vendors to promote innovative cloud services under applications. We expect to have over 1,000 SME customers by the end of this year.

Slide number eight, demonstrates our service channel transformation initiative. As a service provider we are keen to focus on including the quality of all customer service. ECHP is the kind of name for that we are using to establish a brand new spectrum of disputed channels. E stands for user experience. In this innovative service channels we trend to create optimum user experience by communicating on the shared services with our customers. C stands for caring. We print or demonstrate our care by pleasing the dislocate (ph) and offering customized services to people of different ages and in different areas. H stands for holistic. We tend to offer integrated and diversify our telecom services up to customer use. P stands for top priority. We will provide the principle and quality services to retain customer royalty.

We plan to establish over 20 service channels in this year, over 100 in the next year, under 50 both 2013 and 2014. Of course, we will monitor in our fit that effectively of this new channel service centers and adjust our approach if necessary.

Now, I will hand over to Dr. Yeh for our financial results.

Yeh Shu

Thank you, Chairman and a good day everyone. Thanks for joining us today. I will review our financial results in detail beginning with slide number 10. Slide number 10 shows our income statement on a consolidated basis.

Our total revenue for the second quarter 2011 was NT$54.4 billion, a 9.6 % increase, compared to 2010, primarily due to an increase in fixed line revenue resulting from the shift in the pricing right of a fixed-to-mobile call from mobile operators to fixed network operators as well as mobile VAS and the handset sales. Additionally an increase of construction revenue from our property development subsidiary, also contribute to the revenue growth.

Operating cost and expenses grew 12.3% to NT$39 billion. Income from operations for the second quarter of this year increased 3.4% to NT$15.4 billion.

Net income for the second quarter 2011 increased 2.8% to NT$13.3 billion. EBITDA For the second quarter this year was flat at NT$23 billion.

Slide 11, shows our revenue for each business segment for the second quarter of 2011. In the domestic fixed line business, local revenues increased by 33.6% year-over-year, mainly due to the shift of pricing right for fixed-to-mobile calls.

The 13.9% decline in DLD revenue was due to mobile and the VoIP substitution, as well as reflecting the mandated tariff reduction.

Broadband access revenue, including ADSL and FTTx increased by 3% year-over-year, although ADSL access revenue decreased as more ADSL subscribers migrated to fiber solutions, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 11.1% year-over-year, the increase was mainly due to growth in mobile VAS revenue and the handset sales relating to our smartphone promotion which offset the decline in mobile VAS revenue, resulted primarily from the fixed to mobile call pricing right shift.

Internet revenue rose by 3.4%, mainly due to Internet service growth, which was driven by the increase in broadband subscribers and the migration of ADSL subscriber to fiber solutions.

International fixed line business increased by 3.9%, mainly due to the growth of International Long Distance Service revenue and the leased line revenue. Others grew by 369.3% (ph) primarily because of the increase in construction revenue as mentioned earlier.

Slide 12, shows the breakdown of operating costs and expenses. The increase in operating costs and the expenses in the second quarter 2011 was mainly due to the increase in interconnection costs and transition fee resulting from the shift in the pricing right of fixed-to-mobile calls and the higher cost of handsets sold.

As shown on slide 13, cash flow from operating activities was NT$16.3 billion during the second quarter 2011. The year-over-year decrease was mainly due to a higher bonus payout.

We’ve maintained a strong cash position as of June 30, this year with cash and the cash equivalents amounting to NT$81.5 billion.

Slide number 14 shows our results of operation for the first half 2011 as compared with our full year guidance and the results of our second quarter this year operation as compared with our second quarter guidance on a consolidated basis. Our second quarter 2011 results were essentially in line with our second quarter guidance.

Now, I will hand it over to President, Chang for our business overview.

Shaio-Tung Chang

Thank you, Dr. Yeh. Now let me take you through our business performance. Slide 15 shows the results for our broadband services. This year we are forecasting on promoting our 15 megabit per second FTTx services and we expect to reach 400,000 subscribers by the end of this year. We have therefore reduced our broadband tariff in June, especially for high-speed services, such as 20 megabit and 50 megabit per second to stimulate the momentum of migration and the subscription growth, the new tariff print have so far being welcomed. And we that we have received a lot of subscriptions request. Although, the low broadband tariff will have a temporary impact to our revenue, we believe the speed upgrade to well have a positive effect on our promotion of broadband value added service in the long run.

Moving on to slide 17, we have seen further MOD subscriber growth in the second quarter as we continue in reaching the family package with more premium content. This has serviced accelerated the package of subscription growth. We have achieved over 930,000 MOD subscribers so far and we expect it to reach 1 million in November, almost earlier than our original year-end target. In addition, we anticipate that package services subscribers including the four, golden package and the family packages will be over 850,000 by the end of this year.

We have made progress on acquiring content over Dempo with that offering Next TV news, the first of the domestic 24 hours HD news channel, MOD from August 22. Additionally, we have acquired 2012 Olympic, new media broadcasting right for all MOD, mobile and the highlight preview.

Slide 18, on our mobile revenue business, we have been successful in maintaining the highest number of subscribers and the lowest churn rate in the market. As our member obsessed (ph) subscribers continue to grow. We believe we’ll reach our 10 million subscriber target this year as expected.

On slide 19, due to the continued popularity of smartphone, mobile Internet and the mobile data usage continue to increase. By the end of June, there were 1.15 million mobile Internet subscribers showing the strong growth momentum compared to 809,000 as of December last year. As a result, we have raised our year end mobile Internet subscriber target from 1.2 million to 1.4 million, giving the high data traffic on our mobile network. We’ll speed up the contraction and the capacity expansion of the base stations. We anticipate that we will have over 2,000 base stations with speed of 21 Megabits per second by year end.

In addition, we are continuing the installation of Wi-Fi access points to up grow the topic on mobile network and as well to accumulate 20,000 public Wi-Fi access points by end of this year.

Slide 20, on CapEx, we have moderately speedup our capital expenditures for the following years. We are as we mentioned earlier, we have forecasted our fixed and the mobile broadband construction to proceed (ph) the migration from megabit per second era to gigabit per second era. That’s all for the presentation.

We would now like to open up for the questions.

Question-and-Answer Session

Operator

Thank you. We would now begin our question-and-answer session. (Operator Instructions) Our first question is Danny Chu from Nomura. Please go ahead.

Danny Chu – Nomura

Thank you for the presentation. Three quick questions, first, is that on the slide and that you talk about cloud computing. Can management give us some guidance in terms of like what kind of an impact we should expect to see on the ref new as far as the EBITDA from the introduction of cloud computing service for 2012 or maybe 2013? Second question is you projected there will be a very sharp jump in terms of the IPTV subscribers. Are there any special initial tips or price cuts that you’re going to do in order that can explain why the IPTV subscribers will jump very significantly for the remaining six months towards the end of this year. And the final question is that, given that, the company gets on a CapEx forecast on the mobile Internet subscribers. Do you expect the actual CapEx spend and for this year we’ll exceed the CapEx budget that the company gave out earlier this year? Thank you.

Shyue-Ching Lu

Okay. Your first question regarding the operating of cloud computing you know, especially the reason about you know, how revenue or EBITDA in 2012 or 13. It’s a little bit early you know, for us to put up significant numbers on cloud computing at this stage. So, we’ll include in our bills pending for the following years to come. So, I’m sorry and it’s a little bit early to give figures so you mentioned, okay, on cloud computing. In IPTV service, we forecasted that we would have 1 million subscribers by the end of the year. And there is today’s number is already over 930,000. We expect to reach 1 million before the end of the year. To be more specific, that could actually occur in November. And the reason that’s we have a very good growth in number of subscribers and what is our quality of service, our rich contents, you know, all this well received in Taiwan, okay. And the CapEx is within our budget, yes. Mobile, I would like to have President to answer this question.

Shaio-Tung Chang

Well, the mobile internet. And I think to this year, our target went up to 1.9 million customers of the total number.

Shyue-Ching Lu

You know, 1.4 million you know in mobile internet subscribers. And you know the mid work, you know, is we are extending the capacity of our mobile network to our comment (ph) all this mobile internet traffic which is also within our this year’s CapEx, you know, position expansion now.

Danny Chu – Nomura

Thank you. So, if I may, I have a follow up additional question. Given that you mentioned that because like the broadband subscribers have increased on like I mean, quite a lot and you have been lowering tariff. Should we expect that getting into 2012, the company will aggressively lower its broadband tariffs further down in order to drive the broadband subscriber growth?

Shaio-Tung Chang

Currently we do not have this plan. Maybe it’s your anticipation. We back to monitor the market reaction to the service and you know, to see if what will be the tariff, you know for our next year or year after.

Danny Chu – Nomura

Okay. Thank you.

Operator

The next question is Ken Goh from GIC. Please go ahead.

Ken Goh – GIC

Hi, good evening. Thanks very much for the call. I just got one question on your operational data, the market share for mobile by subscribers is going up. But the market share for by revenues is coming down. I’m just wondering what do you think is explaining the difference in the trends in those market shares? Thank you.

Shaio-Tung Chang

I think the one, the revenue I recognize for our mobile segment is affected by the shift in the pricing right of the call, the fixed to mobile call. And other operators, they recognize the interconnection fee, we give to them. So, however, our mobile segment don’t include the internal transfer pricing of their revenue here.

Ken Goh – GIC

Okay, all right. Thank you.

Operator

The next question is Terry Chan (ph) from Credit Suisse. Please go ahead.

Shed (ph) – Credit Suisse

Hi, it’s Shed (ph) here from Credit Suisse. I have five questions for you. Number one, regarding your current plan about both mobile and also on the internet side, should we expect some operating expense increase in a significant way into second half to achieve that? And my second question is regarding the other revenue from construction, what kind of revenue shape we should expect going forward because it’s quite a significant spike in the second quarter. The third question is regarding your CapEx budget, you mentioned acceleration of CapEx budget into medium term. Can you give us a rough guidance of how we should look at CapEx into 2012 or ‘13? And regarding the capital management, you mentioned that there would be a change in payout ratio from the current 90% possibly over the next three to four years. In the meantime, should we assume that there would be no further capital management or is there any trick that we should be looking at? The last question is regarding your guidance. I think your first half result is running quite ahead of your published guidance currently. Should we expect that to at the end of the year to beat the guidance or actually are you expecting some charge or some expense to into be going to the second half that only align to meet your original guidance? And thank you so much.

Yeh Shu

So many questions. Let’s see, I think so far we think our guidance is valid. And we don’t see any reason to change the guidance, okay. And for the tiptoe management issue, at this stage, we don’t know what would happen in the future, okay. But it looks like the CapEx would be a factor effect, the need of our cash, okay. So, but for the CapEx budgets will next few years, we don’t have that number yet, okay. But we would give you the number from we have then available, okay. And for the revenue from the construction, I think that our current policy is the lend policy is for lease, not for sale. And the revenue we recognize this year for all our subsidiary are from lend. We put our – while we started business. So, we will see a development that they would get. But at this stage, the parent company, that China Telecom has not lent to give them more land to develop, okay. And again, the first question is that whether the OpEx to increase significantly in the second half. My answer to your last question is about the guidance. We are thinking the guidance is still valid. So far, we think that we would think our OpEx to control our OpEx. Thanks.

Shed (ph) – Credit Suisse

Thank you very much. Just to follow up on regarding the revenue from the other income from construction basically. So just to be clear again, if the revenue you record in the second quarter could be considered a recurring revenue or is it just one quarter spike and it would be turned to something below what is in the next quarter to come?

Yeh Shu

Those are related to some projects, some of them is still under construction. And some of them has completed. So, for this year, you can, I think the issue is not specifically which quarter, you can refer to our original forecast. Our forecast is still valid at this stage. So, it’s a good idea, go back to our original guidance to look into this issue.

Shed (ph) – Credit Suisse

Thank you so much.

Operator

(Operator Instructions) The next question is Joseph Quinn from Macquarie. Please go ahead.

Joseph Quinn – Macquarie

And thank you for the opportunity to ask a few questions. I’ve got three main questions. The first one is actually on your CapEx again. I know some of the, all the speakers are asking in terms of what you’re CapEx is for 2012 and 2013. And while you may not be able to give an exact figure, you have made clear statements in local press to spend over NT$200 billion in the next 10 years on Taiwan’s broadband and restructure obviously for your own customers etcetera. Can you maybe give a bit more color exactly how we should expect that in terms of impacting your CapEx, should we expect CapEx to increase given the sort of statements? The second question is more focused on your mobile subs at the moment. It does seem that your mobile subs growth has been slowing, and in particular it seems that both Phased (ph) and China Mobile have been gaining against Chunghwa Telecom. And when we look in a bit deeper into your numbers, those seem in particular actually your value added services are slowing in terms of the ARPU number. So can you talk a little bit about that, are you facing more competition on that side of your business at the moment from both of these players? And then the last one is on your MOD service, your IPTV, at the moment, it’s obvious that you’re getting quite good momentum in terms of subscriber growth. But have you a number in terms of when that business will actually make a breakeven point and what do you think about that? Thank you.

Yeh Shu

The CapEx trend in and the year following, we have referred to some newspaper’s report about you know, we mentioned about 200 billion over next 10 years. Well, 200 billion in 10 years average 100 billion a year. And our CapEx is along 3 billion, you know, average. So, it’s really that significant that different from what we spend, you know, this year. But because we would like to accelerate or expedite the raw out of higher speed broadband access so, we may you know, raise a little bit of the CapEx you know, to meet this needs in our raw out of higher speed broadband access. And it will not be significantly higher. Okay? We offer guidance on our performance in our forecast, we saw in the following years. And every year we will improve CapEx in that forecast. Let me take the sole question you know, in more detail. Yes, the company has a very good momentum. And I believe the mission policy of moving forward to physical conversions helps to you know, stimulate the market and as I mentioned earlier that also with good quality of service and rich content in MOD. So, we refer this very good subscriber growth.

The breakeven point you know, probably would occur if we double our number of subscribers. And this is likely to occur in maybe two years. About the mobile subscriber growth slowing, you’re right. Actually from the figure of the number of number integrity (ph) it seems that we are losing some customers from this game. But we do have the confidence that we can achieve to 10 million customers at the end of the year. The major reason, our growth is slowed because of the two major competitors provide a tariff plans in that free. And we all have some counter majors to face that. As to the value added service ARPU, according to our figures we are growing a little bit.

Joseph Quinn – Macquarie

Can I just follow up, sorry, just in terms of your saying the value added service. What I noticed is the actual value for your value added services seems to have really flattened in terms of sort of March, April timeframe, they start to really slower divers ability. That’s before the sort of plan that you just mention as far as China Mobile announced they’ve only just reached in their stores. I’m just wondering, you know, if this is something that’s been happening over a few months now, it’s not just something that happened the last month. So, I’m just wondering, is there anything else in particular you’ve seen them do differently that maybe has been a reason for users porting over? Thanks.

Yeh Shu

According to our figures, for this Q2, value added service growth compared to last year it’s 40% success (ph). So, I don’t know if your figures are right or not.

Joseph Quinn – Macquarie

Sorry, I’m not referring to the exact bad growth on the actual year-on-year. I’m looking at the actual ARPU on your value added service bases that you get from your subscribers. I’m happy to share my numbers with you outside they’re based on your own numbers. Thank you.

Operator

Our next question is Steve Lie from SCB. Please go ahead.

Steve Liu – SCB

I have two questions. One is regarding your cooperation with China Telecom, understanding your Twain (ph) corporation on a Wi-Fi roaming. Can you provide more details about the current corporation and the future plans that corporation with China Telecom. And second is, can you be a brick down in the EBITDA margin, it just gives me the mobile especially in the EBITDA margin based on the mobile subsidy revenue. Thanks.

Shyue-Ching Lu

Okay. About the Wi-Fi roaming, we have the tough launch this service for less than one month. So, as to see how is the revenue, and that becomes our forecast is to give our customer more convenience not for revenue concern.

Steve Liu – SCB

So, do you have other plans to like the roaming, like Taiwan is going to China for some province for the roaming. As the close roaming partner is China Telecom. So, this is like this. Are the ICT related to services. And I understand the Phase tone (ph) is working with China Mobile like while CT and IT solutions, a wide range of corporation. What are you plans with China Telecom in China markets?

Yeh Shu

We do have provided the service to call to sim to travel that our customer if they’re roaming to China, we have relation with China Mobile and to Hong Kong, Singapore to several countries with one sim card. So, that is something like corporation with China Mobile. We’ll have the other arrangement.

Steve Liu – SCB

Okay, thanks. How about your EBITDA margin for mobile phone business, the mobile service revenue business?

Yeh Shu

We don’t provide EBITDA margin by segment.

Steve Liu – SCB

Okay, thanks.

Operator

(Operator Instructions) The next question is Gary Yu from Morgan Stanley. Please go ahead.

Gary Yu – Morgan Stanley

Hi, thanks for the opportunity for me to ask the questions. I have two questions from my side. First of all, what’s management feud on data Tier pricing? Is there any talk between Chunghwa and the NCC in terms of moving to unlimited data plan to Tier pricing on mobile internet? Second question is just for my book keeping reference, what is the rough revenue amount Chunghwa booked in second quarter from your property construction project? Thank you.

Shyue-Ching Lu

For mobile Internet, you know, of course it’s better to have you know, Tier pricing. This is more reasonable because of limited resources available from mobile spectrum. But you know, as of now in Chunghwa Telecom, our priority is to expand our network capacity to meet the needs of our customers in our full mobile internet access. If we reach to seventh stage of you know, extension, then probably we’ll consider along the lines up to some of our NCC commissions promoting to shift from unlimited to Tier pricing. We will consider, yeah.

Yeh Shu

Regarding to the property construction project, as I mentioned on slide 11, the segment of other revenue, most of the increase came from the property construction revenue. So you can see through the number approximately from there. Thanks.

Shaio-Tung Chang

And something about the ARPU of our mobile services. As Q1 last year, our ARPU after data VAS is $91. In Q2 this year is about $128 for your reference.

Operator

Hi, Gary, do you have any follow-up?

Gary Yu – Morgan Stanley

No, thanks. Thanks management.

Operator

(Operator Instructions) Our next question is Lucy Lee from JP Morgan. Please go ahead.

Lucy Lee – JP Morgan

Hi, thank you. I have two questions. One is on the smartphone handset pipeline for install, just the window what’s your strategy going forward. Are you intending to promote to more MAC markets like mid-ends or low-ends muffle or just you’re targeting at you know, that you meet your high-end. And secondly you know, we heard that some – for instance your competitors debt, NCC basically perceives Taiwan Telco to use the Chinese equivalent vendors in the co-network part. So, just a window what’s the impact potentially on your network and roughly any CapEx implication? Thank you.

Shyue-Ching Lu

Smartphone has that, I think it’s the first stage – on the high-end customers such as iPhone or HTC handset. But because high-end customer well be separated, it’s only later. So, in the near future, we’re forecast our middle layer, that means the handset price is about to life in $300 this area. That well, be more customer enjoyed.

Operator

(Operator Instructions).

Yeh Shu

Excuse me, your second question is about. You have heard of NCC’s some stiffening. And…

Lucy Lee – JP Morgan

No, basically I think we heard that NCC as that they, if you try they do not allow to use Chinese equivalent vendors in terms of the co-network do that. So, that’s your knowledge, some other competitors mentioned they need to replace part of the co-network’s CapEx, transmission part of network to the other vendors besides, beyond China. So, do you heard of things, things like that or do you have such a player well?

Shyue-Ching Lu

It (inaudible) we procure our equipments from the open market and you know, often it’s competitive beaten us. So, you know, and this it’s a very clear official requirements. We procure our equipments from the, you know, open tender basis, yes.

Lucy Lee – JP Morgan

Okay. Okay, thank you.

Operator

(Operator Instructions) Chairman, do you have any further closing comments.

Shyue-Ching Lu

Well, thank you very much for your participation in our conference call for the first half 2011 results. Thank you very much.

Operator

Thank you, Chairman Lu. Thank you for your participation in Chunghwa Telecom conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the in-focus section. You may now disconnect. Good bye.

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