Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Chunghwa Telecom Co., Ltd (NYSE:CHT)

Q4 2011 Earnings Call

February 22, 2012 4:00 am ET

Executives

Fu-fu Shen – Director, Investor Relations

Shyue-Ching Lu – Chief Executive Officer

Shaio-Tung Chang – President

Shu Yeh – Chief Financial Officer

Analysts

Danny Chu – Nomura

Chate Benchavitvilai – Credit Suisse (Hong Kong) Limited

Joseph Quinn – Mcquarie Securities

May Lin – Yuanta

Steven Liu – Standard Chartered Bank (Hong Kong)

Gary Yu – Morgan Stanley

Sydney Zhang – Bank of America/Merrill Lynch

Piyush Mubayi – Goldman Sachs

Operator

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom Co., Teleconference Call for the Company’s 2011 Operating Results. During the presentation, all lines will be in listen-only mode. When the briefing the finished, directions for submitting your question will be in the question-and-answer session.

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 In Focus section.

Now, I would like to turn it over to Fufu 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 full year 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. This will be followed by Q&A. Before we continue, please note our Safe Harbor Statement on slide 2. 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 full year 2011 earnings results conference call.

On slide no. 3, our total consolidated revenue for the full year 2011 amounted to NT$217.5 billion, with the increase mainly due to higher fixed line revenue resulting from the pricing right shift for fixed to mobile calls, as well as the increase in mobile VAS revenue and handset sales. Higher construction revenue from our property development subsidiary also contributed to the revenue growth.

Moving onto slide no. 4, we have maintained a 90% payout ratio for past few years, and this is expected to continue. On January 4, the amended Company Act was announced. In accordance with the amendment, a company that is profitable is allowed to directly distribute cash to shareholders from its capital surplus or legal reserves. Our capital surplus and legal reserves as the end of 2011 totaled NT$169.5 billion and NT$66.1 billion respectively.

As we understand the importance of stable dividends to some investors, the management team will decide whether to take advantage of this amendment and distribute this special dividend based on operational results. Relevant proposals require board and AGM approval prior to implementation.

We recently participated in China Airlines’ secondary offering and signed an MOU with the airline to form a strategic alliance. The board approved the project on January 16 after an extensive discussion by board members, which included the effectiveness of a strategic alliance, the execution of co-operation, and whether the possible risks could be acceptable. Prior to receiving boards approval, the issue was also discussed by the board’s strategy committee back in August 2011.

Now, I would like to hand over to President Chang to present our business overview.

Shaio-Tung Chang

Thank you Dr. Lu. In order to make a proper comparison with the peers, we would like to normalize the effect of pricing right shift for fixed to mobile calls. After normalization, the pro forma mobile service revenue represented a growth rate of 3.9%, the highest among the three major operators.

Furthermore, our market share of mobile service revenue remained flat, evidencing our success at maintaining our market prominence.

On slide 7, you can see mobile VAS revenue growth rate after normalizing the effect of a temporary price discount, demonstrating our success at maintaining our growth momentum and competitiveness. This temporary discount, which involves subscribers whose mobile data usage per month is less than or equal than 1 gigabyte being given a 20% discount, will last until December of this year.

Mobile data network quality remains our focus. We would like to ensure we maintain our leading edge in terms of network quality. Our construction and capacity expansion of base station is on track. By the end of this year, we plan to have 4,000 HSPA+ base stations to provide more capacity in hot spots in order to effectively relieve traffic congestion. In addition, we are continuing to install Wi-Fi APs to offload the traffic from mobile networks, and we expect to accumulate 30,000 public Wi-Fi APs by the end of this year.

Moving to slide 8, let’s return to mobile business. As mobile competition is becoming increasingly fierce, we plan to supplement existing strategies by offering popular high-end smartphones as well as mid-and low-tier models in response to customer demand and to provide attractive value added services. Please see the next slide for the various models we offer.

On slide 9, due to the continued popularity of smartphones, mobile Internet and the mobile data usage continue to increase. At the end of last year, we had 1.5 million mobile Internet subscribers, representing strong growth momentum of 85.4% year-over-year. We expect to add 700,000 mobile Internet subscribers by the end of this year, representing 46.6% year-over-year growth. Our smartphone penetration rate had reached 23% in terms of our postpaid customer base at the end of 2011.

Slide 10 shows the results of our broadband business. Migrating broadband customers to higher speed has been our major strategy for the past few years.

As telecom is a regulated industry, we reduced our fiber tariff in June last year in order to satisfy customer demand for lower broadband tariffs and to minimize regular intervention. This brought in 400,000 fiber subscribers, including those upgraded from our ADSL service. We anticipate that relevant revenue will return to the level before this tariff reduction by the second quarter of this year due to continued revenue growth momentum.

As part of a separate initiative, we offered a 20% discount of ADSL subscribers at the start of this year in order to expand our subscriber base. Overall broadband revenue, which has been affected due to the two tariff reductions that I mentioned, should recover to second quarter 2011 levels by the second quarter of 2013. We’re now anticipating that this move will bring in non-broadband subscribers and help us acquire customers from cable operators as well as enhance customer loyalty. We expect the subscriber net add for this year to be 500,000, as customers are our most important resource. We believe more customers will utilize our broadband value-added services due to this initiative.

Moving onto the slide 11, MOD subscriber numbers and revenue have continued to increase. We expect to acquire additional 500,000 customers this year, which will directly contribute to revenue. We have made progress in terms of acquiring quality content. For example, we have acquired new media broadcasting rights for the 2012 Olympics for our MOD, mobile and HiNet platforms. And recently, so called Linsanity has boosted our household viewing rate since many of our MOD subscribers wish to watch Lin’s games via HD quality broadcasting.

Owing to the declining trend of the traditional market and regulation dynamics, we are focusing on paving new avenues for revenue stream.

On slide 12, in addition to our traditional telecom service, we have expanded our corporate business scope and focus on ICT businesses to include governmental projects. Our corporate ICT business revenue amounted to NT$6.2 billion for fiscal year 2011, representing a year-over-year increase of 29.8%.

Moving forward, we expect this service revenue to continue to grow in 2012. We will also continue strengthening our cloud computing infrastructure and closely cooperate with relevant partners to develop innovative cloud applications including personal, storage, enterprise, tourism, distribution, and healthcare cloud services to further expand our revenue stream in the mid term. In the first half of this year, we plan to offer personal, storage, and enterprise cloud services.

Moving to slide 13, in August 2010, we began to study business opportunities for tourism cloud services as the government has announced that its decision to focus on the development of tourism industry. We started a dialog with the relevant parties of the industry in March 2011 regarding the offering of ICT services on a tourism cloud platforms. Moreover, we established Transportation & Tourism service department in December of this year to develop relevant cloud platform.

China Airlines, the leading airline company in Taiwan, has a significant influence on the tourism value chain, with more than 2,000 domestic travel agencies, as well as the availability of China Airlines service channels in 25 major cities in Mainland China. The formation of the alliance will facilitate the development of new business.

With our participation in China Airlines secondary offering earlier this year, we expect to leverage the airline’s expertise and operational experiences within the tourism and transportation industries to develop relevant ICT services, including intelligent tourism and the transportation cloud services. We plan to offer tourism cloud services to serve the value chain of the tourism industry and we expect China Airlines to help by introducing and acquiring parties, along the chain as well as their customers.

A special committee has been stet up to advance the project, and the board will review it periodically to ensure its effectiveness. In addition, we will periodically report on the progress of the cooperation to all of our investors. Please refer to slide 14 for the major items of the MOU we signed with China Airlines.

There are three aspects of cooperation, including tourism services, aviation ICT services and enterprise cooperation. In terms of tourism services, both company will work together to initiate a comprehensive business environment for the tourism value chain, and to promote intelligent B2B tourist service packaging and operations by integrating our ICT service and China Airlines tourism products.

As we mentioned earlier, we started researching cloud service opportunities within the tourism industry in mid 2010, and we are aware of the entry barriers for new business. However, following the announcement of our cooperation with China Airlines, some tourism value chain partners have contacted us regarding possible business opportunities. We expect to play the role of mediator to create value for the different parties within the value chain, and to provide tourism with a seamless service via our tourism cloud platform.

On slide 15, a combination of regulatory change and increased market competition resulted in pricing pressure in 2011. We anticipate that these pressures will continue in 2012, with market conditions impacting revenues and cost and expenses. However, we expect to generate growth momentum from our outgoing development of FTTx, fixed and mobile VAS, cloud computing, ICT enabled services and enterprise [solutions]. And that’s all for our operational review, I will hand over to Dr. Yeh for our financial review. Thank you.

Shu Yeh

Thank you, President Chang and good day everyone. Thanks for joining us today. I will review our financial results in detail, beginning with slide 17. The following discussion is focused on the fourth quarter of 2011. Please refer to the slides for the full year 2011 results.

Slide 17, show our income statement on a consolidated basis. Total revenue for the fourth quarter of 2011 was NT$54.9 billion, a 5% increase compared to the same period of 2010, primarily due to the higher fixed line revenue resulting from the pricing right shift for fixed to mobile calls, and the increase in mobile VAS revenue and handset sales. Additionally, higher construction revenue from our property development subsidiary also contributed to the revenue growth. This revenue growth was offset by the decline in revenue due to mobile and VOIP substitution, the mandated tariff reduction as well as our company’s tariff reduction.

Operating costs and expenses for the fourth quarter of 2011 grew by 10.2% to NT$43.1 billion. Income from operations decreased by 10.4% to NT$11.8 billion. Net income decreased by 5.9% to NT$10 billion. EBITDA decreased by 7.2% to NT$19.9 billion, mainly as a result of the increase in operating costs and expenses.

Slide 18 shows our revenue for each business segment for the fourth quarter of 2011. In the domestic fixed line business, local revenues increased by 26.6% year-over-year, mainly due to the shift of pricing right for fixed to mobile calls. The 13.1% decline in DLD revenues was due to mobile and VOIP substitution, as well as reflecting the mandated tariff reduction.

Broadband access revenue including ADSL and FTTx decreased by 1.9% year-over-year, mainly due to the company’s tariff reduction in June as well as the mandated tariff reduction; mobile revenue increased by 7.3% year-over-year. The rise was mainly due to the growth in mobile VAS and handset sales relating to our smartphone promotion, which offset the decline in mobile voice revenue resulting primarily from the fixed to mobile calls pricing right shift and the mandated tariff reduction.

Internet revenue decreased by 1.7% also due to the company’s tariff reduction in June. International fixed line revenue decreased by 1.1%, mainly due to the decrease in international long distance service revenue as a result of market competition. Others declined by 7.7%, primarily due to the less revenue consolidated from the subsidiaries.

Slide 19 shows the breakdown of operating costs and expenses. The increase in operating costs and the expenses in the fourth quarter of 2011 was mainly due to the increase in cot of handset sold, and interconnection costs and transition fees resulting from the shift in the pricing right of fixed-to-mobile calls.

As shown on slide 20, cash flow from operating activity decreased by 9.4% year-over-year to NT$29.3 billion during 2011. We maintained a strong cash position as of December 31, 2011 with cash and cash equivalents amounting to NT$67.4 billion.

Slide 21 shows our 2012 unconsolidated forecast. Total revenue for 2012 is expected to decrease by NT$3.6 billion to NT$188.9 billion, primarily due to a NT$2.4 billion decline due to a reduction in tariffs for domestic long distance calls, a NT$2.0 billion resulting from the mandated tariff reduction, as well as the broadband price cut, promotional packages for free on-net calls and the decline in voice revenue. However, our ongoing promotion of mobile Internet, broadband services, MOD and cloud computing services is expected to partially offset the decline.

Operating costs and expenses for 2012 are expected to increase by NT$2.5 billion, mainly due to three reasons. First, the promotion of our mobile internet and broadband businesses; second, maintenance and material expenses, which are expected to increase; and third, handset costs relating to smartphones sales, which are also expected to rise.

Furthermore, expenses to acquire digital content are expected to rise, relating to the content such as broadcasting rights for 2012 London Olympic game. As a result, income from operations and EBITDA are expected to decrease as compared to 2011.

Non-operating income is expected to decrease due to a decline of the profit relating to the construction sales from our property development subsidiary. Hence, net income and the EPS are expected to decrease year-over-year.

Moving to slide 22, we will moderately speed up our capital expenditure for the following years. As mentioned earlier, we will focus on fixed and mobile broadband construction to facilitate the migration to even higher speed fiber solutions.

And at the same time, we also assess the efficiency of our CapEx utilization. Budgeted CapEx for 2012 is NT$ 33.1 billion and we will continue to focus on core business for future investments.

That’s all for the presentation. We would now like to open up for questions.

Question-and-Answer Session

Operator

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

Danny Chu – Nomura

Hi. Thank you for the presentation. I have four questions. First is in terms of the CapEx guidance for 2012, can you help us to better understand of the NT$33 billion that the company is going to spend in 2012? Is it going to stay at that high-level like, I mean into 2013 and just onwards, it is non-recurring kind of like I mean trend for 2012, that’s my first question. Second question is, with regard to the capital management plans, can you help us to understand it right now given the change in the company and is the company leaning more towards paying out special dividends versus capital reduction, are there any key considerations in terms of like I mean, which strategy the company will take i.e., between capital reduction versus special dividends, that’s second question. Third question is with regards to the guidance that the earnings guidance given out for 2012 like, since we see that NT$17 decline in terms of a net income, is it a base case scenario or you are pricing in a worst case scenario for a 17% net income drop in 2012. and last but not least the final question is, with regards to the participation in the China airlines secondary offering, can you help us to understand if it’s like a must or mandatory that we have to participate in this secondary offering in order to have a strategic partnership with China Airlines? Thank you.

Shyue-Ching Lu

Entering to your first question let me say this, as we assess the market situation, we believe it’s the time to expedite or rollout of higher speed solutions, and that’s basically the reason for us to have higher CapEx for 2012. The higher speed maybe up to 100 megabits per second, we would also monitor the market situation and to see how our customers receive this offering. So the actual spending, we’ll go along with the demands from the market and if the demands build up, I believe it’s good for the company, then we will probably continue this kind of a rollout, otherwise we will revise our CapEx spending for the following years. We will be dynamic and very responsive. Thank you.

On the capital management, we’d like to say that we keep our option open. we will consider an appraisal to make use of this special cash dividend permitted by the revised, amended company act or other means of capital management based on our performance, our operational results. And we will make proposals to the Board and at the end; if we didn’t (inaudible) we keep this option open.

Shaio-Tung Chang

And I would like to add some background information; you see this topic has been discussed many times before for the sole. First of all, we have cash, we will focus on our operation use, our CapEx first, then if there any excess fund available, we would see the [PRS] dividend, then we would also, if there are some additional funds, then it’s possible for capital management. So as we observed in the past, the source of cash for the [profit] capital management came from the difference between the depreciation expense and the CapEx. and now, as you can see, now the difference is closed or maybe even it’s possible CapEx might be even higher, then depreciation in the future. So currently, that’s our observation, okay.

Now that special dividend is a new option offer and as the Chairman just talked about the nature of this special dividend. so we would take into consideration in the future. And for the third question is about the guidance, I think it’s a biased one, it’s the scenario, we kind of believe it’s most likely to occur. So it’s not a worst-case scenario, we believe it’s most likely achievable. Okay.

and for the fourth question, it’s kind of required to maintain the close relationship with the China Airlines in a process when we’re talking about the possibilities of getting some of their shares and we have some meetings with their management teams. and I think our people kind of contact with their people before, but we didn’t receive the support as we are receiving now. So it’s really important to have deeper relation in order to get their help, otherwise they are also independent business. so they would then come to help us. So, once we get some shares and we can get a closer relationship, that’s why we think it’s necessary to make these investments. Thank you.

Danny Chu – Nomura

If I may just ask very clearly, a small follow-up question. With regards to the CapEx spending, so should we assume kind of like the (inaudible) i.e., CapEx as a percent of sales somewhere from 10% to 12% is over. and then now going forward, we should expect our CapEx to sales for Chunghwa will be like I mean around 17%, 18%. A second follow-up question is with regards to the [collect] the fourth, by what they would decide kind of like I mean between capital reduction and special dividend? Thank you.

Shyue-Ching Lu

Regarding the CapEx trend, we had the reference, benchmark reference for our CapEx to revenues of 15% and the funded profit is about over 17%. and it’s as I said earlier, if the market responds to our higher speed offering is very positive, then probably we will maintain both [two procedures] this rollout otherwise probably we will reduce within 15%. Regarding to the follow-up second question is date, is that right?

Danny Chu – Nomura

By what day will we hear from the Board in terms of like whether it will adopt capital reduction or special dividend as a way to kind of like I mean...

Shyue-Ching Lu

Okay.

Danny Chu – Nomura

Pay the...

Unidentified Company Representative

As this kind of the solution is to be approved by both the board directors and also the shareholders’ meeting. Coming to our agenda, for this year’s AG and it’s going to be in June. So the last chance is for the Board to consider this year’s in April. If special circumstances arise a temporary AG, the shareholders’ meeting will be called then anytime.

Danny Chu – Nomura

Thank you.

Operator

The next question is Chate Bencha from Credit Suisse (Hong Kong). Please go ahead.

Chate Benchavitvilai – Credit Suisse (Hong Kong) Limited

Thank you very much for the call and good afternoon gentlemen. I just have four questions if I may. the first question is regarding the mobile discount on the mobile data service that you’re currently giving. When would be – and again, at end of this year, December 2012 and do you continue to see the impact throughout the year? So that’s the first question. The second question is regarding the broadband revenue that you expect to return to the level before tariff cut in the second quarter of this year.

Are you referring to the excess revenue or to the ISP revenue or to both excess and ISP? the third question is related to the previous one. if this recovery in revenue would be to actually an increase price or you expect to maintain the price at its level and that would be actually to an increase in subscriber scale? The last question is regarding the CapEx. I understand that the budget you set for 2011 was above NT$30 billion, so but you end up spending only around 80% of that. Is it, could it be the same case for 2012 as well that you’re going to spend much less than the figure that you’re giving right now that you think that it’s already commit and we will see a CapEx, it really increased to NT$33 billion? Thank you very much.

Unidentified Company Representative

Let me answer the first and the third question. The third is that the mobile discount at the end of this year, and the third one, how can we recover the broadband revenue has two factors, firstly in larger customer basis, as a deformation that they are still 100, similar meeting customs that don’t have data services. And besides other we have migrated our customer to higher speed, to higher speed and in the higher ARPU. Thank you.

Last question on CapEx you know the spending in 2011 is around close to 90% I believe, it’s about 90% and 80%, okay only 80% and as I said, we engage our spent CapEx along with the market assistance of our fiber solutions and we’re not consuming, we’re going to expedite the rollout of fiber solutions if our customers respond positively and otherwise it could be slow and of course, less CapEx to be spent?

Unidentified Company Representative

Frequently, about the broadband revenue recover both from the ISP and access.

Chate Benchavitvilai – Credit Suisse (Hong Kong) Limited

Thank you. Just one follow-up question on the dividend side. Thank you for the very detailed explanation earlier on. just one thing I would like to clarify, in the presentation, I understand if you success you would aim to maintain the several dividend, however in light of your guidance for a decline in revenue into, decline in earnings into 2012. Does it mean that you – first of all, does that maintain that said low dividend include special dividend as well, that’s the first question? And the second question is in the cash [debt] earnings decline and the regular dividend decline as well in line with the decline in earnings, would you increase the special dividend in order to maintain that level or is it, or are we talking just regular dividend? Thank you.

Unidentified Company Representative

Okay. I’ll say the first one I’ll give you some information for CapEx. Last year, the CapEx execution level is 85% over the budget. The budget number was NT$31.1 billion. That’s related to and also some of the reason if you know the budget number, it’s sometimes the cost drops, okay. So there are many factors to see how much we actually achieved in. And for the (inaudible) I think so far we kind of haven’t finalized about how to use these actions. This is a specialty dividend, its (inaudible) but what we understand is it’s important to have kind of stability with the income for some people. Some of the investor, they talk to us about this. So we have to clarify later on with the Board members about what they’re thinking on those issues. Okay, but so far we want you to understand we take this issue seriously and kind of to see how shall we do in the future. So far we don’t, we haven’t made any decision or anything there yet. Thank you.

Chate Benchavitvilai – Credit Suisse (Hong Kong) Limited

Thank you.

Operator

The next question is Joseph Quinn from Mcquarie Securities. Please go ahead.

Joseph Quinn – Mcquarie Securities

Hi, thank you very much for the call and opportunity to ask some questions. I have four key questions here. Firstly, in terms your broadband revenue and the expectation of returning to same level by second quarter this year, do you feel that could be a bit challenging given the [cuts] and it is our prices and also that cuts you expect from the 1 of April? On second question, in terms of your mobile strategy this year, and again, you gave a target of recovering ARPU by second quarter ‘13.

Can you discuss what you believe you’ll do different in your mobile strategy in 2012, and if the spending of the 20% discount if they would actually, have a result in increase in churn, is there a risk there? The third part is in terms of the EBITDA margins, can you discuss a little more detail about, you mentioned the maintenance and material expenses, can you just talk a little more detail on that and also maybe if why, you’re maybe not seeing any increase in the mid-tier handsets, but I thought that would have helped maybe in lowering your costs overall. And then fourthly, regarding MOD, which seems to be getting good traction, can you kind of give us a breakdown of how, what revenue contribution was from MOD in 2011 and any expectations for 2012 and also in terms of the broadcasting, Olympics games broadcasting rights, how much do you feel this is going to increase your content costs overall for MOD in 2012? Thank you.

Unidentified Company Representative

Well, let me take your last question first, okay. The broadcasting rights offering IPTV MOD service non-telecom we maintain a platform, open platform for all the applicators that are out there, programs to be broadcasted through our channels and we control the content cost very carefully and we basically maintain the level that was spent to us with previous years. So we’ve not significantly increased our costs in content acquisition, okay. I think we want to clarify your first one, your first question, we say we’d return to the send label as Q2 that is meant to the broadband revenue related to our fiber solution to fiber access FTPs, it’s now the total broadband revenue, because we are the (inaudible) talking about price cut in the June of last year, plus it’s related to the fiber, okay.

And the second question you mentioned is also needs some clarification. It’s now related to mobile. It’s also related to on the broadband. It’s talking about the overall impact including the ADSL cut earlier this year. The impact for the both, for the fiber and ADSL cut would recover by the second quarter of year 2013, okay. So that makes the clarification about your questions. But the MOD revenue and there are three parts and (inaudible) about 35%, from VOD is about 10%, other 50% from the TV channels.

Can you repeat your question about EBITDA margin, is kind of a long question, I couldn’t…

Joseph Quinn – Mcquarie Securities

Yeah, okay. Sorry about that. Yeah, just in terms of the EBITDA, you had mentioned, well actually not dragging on EBITDA, you mentioned in terms of operating costs. But you had seen an increase on maintenance and material expenses. Can you maybe discuss that in a little bit more detail? And I have just two follow-up questions post that. Thanks.

Unidentified Company Representative

That is because of the broadband service and the mobile service, the traffic increase, so we have to have more of those in maintenance. For example, the demand for the bandwidth increased for our mobile service and we have to have more upgraded system and need some more maintenance and the power and those kinds of issues. Thank you.

Joseph Quinn – Mcquarie Securities

Okay. And can I just follow-up sir, so in terms of may be on your mobile front, can you just discuss a little more about how you feel ARPU will trend for mobile in 2012? What’s strides does the company have in that sense?

And then on the broadband side, I understand that you’re increasing your broadband speed a lot, but it does seem that every often the broadband speeds are being reduced in prices also. And I also see cable companies offering similar packages of maybe 10% to 15% discount to your (Inaudible) high-speed packages. I just wondered is that going to be a longer-term issue for you or do you think the cable companies are not having much of a concern? Thanks

Unidentified Company Representative

Actually that’s about the broadband, not mobile, right? About broadband speed we are providing (inaudible) two ways compared to a cable companies, they can provide 100 megabits but they cannot provide it two way. They are below the speed (inaudible) much lower than ours.

Joseph Quinn – Mcquarie Securities

Okay, thanks. That’s very helpful. And just in terms of your mobile strategy, what do you think you can do differently this year to help your overall mobile momentum? Thanks.

Unidentified Company Representative

Because there are smartphone, it’s more popular. Actually smartphone ARPU is higher than the featured phones and this year we’re focusing more about 70% our handset (inaudible) is smartphone. So comparatively the ARPU will be a little bit higher than last year we hope.

Joseph Quinn – Mcquarie Securities

Okay, thank you.

Operator

The next question is May Lin from Yuanta. Please go ahead.

May Lin – Yuanta

Hi, thanks for the call and taking my questions. I have two questions. First in your 2012 guidance, you’ve mentioned about there is NT$2.4 billion decline on revenue side due to the local domestic long distance call tariff cut. Is this the worse scenario or based on January actual operating regards, what you think is realistic?

And second question is relating to your margin operating costs side. Can you talk a bit more about your current smartphone mix in terms of low-end, medium and high-end in terms of the bottom sales? Would like to get a [filling] about is there any other room for us to lower the (inaudible) cost, offering more a low-end smartphone side? Thank you.

Unidentified Company Representative

Okay, for the first question, as I earlier talked about for the financial forecast, it’s the most likely case we believe. So it’s not the worst or best, it’s just what kind of we analyze the data, it’s what we believe, okay. And for the second question is we kind of have equally for the high and medium and the low-end smartphone. So we focus on all of them and in the number of unit we kind of sold, it’s kind of distributed evenly into the three categories, okay.

So I think one issue whether we should offer more lower in the smartphone, it’s interesting. But however, adjusting lower end smartphone, we can substitute less. But however, at the same time the ARPU for the low-end smartphone user is also lower. So when we offer a smartphone, a package, we take it into consideration both of revenue and the cost. Thank you

May Lin – Yuanta

Okay. Sorry, may I, I’ll ask a quick question, you mentioned about a lowering smartphone on your case generate actually lower, also can you clarify a bit what kind of price range you’re paying under definition for the lower end smartphone?

Unidentified Company Representative

Lower end, our definition is something like below NT$10,000 or…

May Lin – Yuanta

Okay.

Unidentified Company Representative

Or something like US$300.

May Lin – Yuanta

Okay, great. A quick question, your smartphone penetration rate in terms of total subscriber base at end of 2011 still like 15% something based on your (inaudible) is there any missing in you’re targeting 22% or the numbers incorrect on my side?

Unidentified Company Representative

I think our smartphone penetration rate at end of last year was 22%.

May Lin – Yuanta

22%.

Unidentified Company Representative

Yeah.

May Lin – Yuanta

Okay. So any target guidance for end of 2012?

Unidentified Company Representative

Targeted about 25%.

May Lin – Yuanta

25%?

Unidentified Company Representative

Right.

May Lin – Yuanta

Okay, thank you.

Operator

The next question is Steven Liu from SCB (Hong Kong). Please go ahead. Steven Liu?

Steven Liu – Standard Chartered Bank (Hong Kong)

Thank you. I’m sorry. I have three questions. The first is regarding the data traffic of loaded by the Wi-Fi. What are the percentage of (inaudible) of loaded by Wi-Fi network? The first question. Hello, hello.

Unidentified Company Representative

Yes.

Steven Liu – Standard Chartered Bank (Hong Kong)

Yeah.

Unidentified Company Representative

I think About 8%, but in special (inaudible) upload 30% well higher to 30%.

Steven Liu – Standard Chartered Bank (Hong Kong)

Okay, thank you. And the second question regarding IPTV, I think you’re well compared to offering the HD program compared to the cable TV operator, but my question is any regulatory concern of your business in providing IPTV? Second is that what your target of penetration for IPTV subscriber? How you know have meeting broadband subscriber on around 1 million IPTV subscriber? Thank you.

Unidentified Company Representative

The target number of customers for this year end is about 1.5 billion subscribers, okay. And regulatory concerns over our IPTV operation is we do have regulatory concerns about our ability to offer channels service on IPTV. Currently the division for (inaudible) from only any channel, yeah…

Steven Liu – Standard Chartered Bank (Hong Kong)

Yeah.

Unidentified Company Representative

We just perform, yeah.

Steven Liu – Standard Chartered Bank (Hong Kong)

Okay, okay. And last question regarding the EBITDA. What’s the EBITDA margin for mobile business and fixed line business and what’s the trend going forward?

Shyue-Ching Lu

We don’t – we will not release this numbers. Okay, thank you.

Steven Liu – Standard Chartered Bank (Hong Kong)

Any guidance on the trend on the mobile EBITDA margin, is it improving or still under pressure?

Shyue-Ching Lu

The factors is, there is some pressure on the tariff for then for this year the long distance call tariff reductions, of course it will impact the EBITDA margin. Okay, and also the higher cost related to markets just mentioned maintenance, and may be like handset sales we have to look, how it will develop. So we know the factor, how the factor will affect EBITDA margin, but we need to wait until we see how those scenario evolve. So far we don’t provide the trend, we just talk about factors affecting our EBITDA margin significantly. Thank you.

Steven Liu – Standard Chartered Bank (Hong Kong)

Okay, okay, thank you.

Operator

The next question is Gary Yu, Morgan Stanley. Please go ahead.

Gary Yu – Morgan Stanley

Thank you. I have four questions; first one, it’s regarding to your mobile business, you mentioned that your growth rate, adjusted growth rate for last year was around 3% to 4%. What do you expect the growth rate to be for this year, as it going to be accelerating based on the recent monthly trend? And a related question is, why, are you still giving the discounts for one data usage per month, when has not been the case for your competitors. The second question regarding your broadband business, did you foresee any further price cuts either on the ADSL side or the fiber network side, as you continue to accelerate the tick up rate of the fiber services?

Third question regarding your capital management plan, you mentioned that capital management obviously depends on operational outlook, and then obviously the pace of the guidance you’re expecting, suppose it should decline in earnings, at the same time you will see higher CapEx requirement and the gap between capacity depreciation has lower, what did they [just] assume that the at least in the near term capital management is not one of the priority of our management to consider given the conservative operational outlook and some CapEx, is in the next of couple of years.

And lastly in terms of your M&A strategy, that Chunghwa Telecom has other industries where the company has been in terms of developing cloud computing platforms and if we expect more industries in cloud computing, should we also expect similar minority purchase in companies in those industries similar to what company gets for China Airlines, thank you.

Shaio-Tung Chang

Okay for the last question, we do not rule out any possibility if we need to give more domainology or gets some more cooperation with (inaudible) our partners. We don’t rule out the possibility to invest, okay but however we would do this, we – some guidance our Chairman will talk about the guidance.

Shuye-Ching Lu

Regarding M&A strategy the company has an internal regulation, the regulation requires approval from the AGM. The regulations did pace up the non-tier cum investment cannot exceed 20% of operating capital. And so in our [number] everyone has (inaudible) capital that means, it’s about NT$15.5 billion, and our current investment according to our consideration, it also can be classified as non-tier related amounts to about 73% of that amount. So actually it will be very prudent in considering any opportunities, and besides that as the company focused on our core business, and this principle will not change.

The CapEx, the capital management issue, I mentioned two times during this conference call, we will keep our options open and we will catch our operational results and make proper decisions at the right time, okay. And we do not rule out any possibility.

I would like to emphasis the 20% limit of the capital limit for M&A type, is it related to non telecom investments. So if it is directly related to telecom investment, then it would not subject to the 20% balance restriction thank you.

Shyue-Ching Lu

First question about the mobile business focused about growth rate, 9% this year because of this tariff cut that will be happened in April. And second question is about the price discount about eight megabit, because we announced last year, so it will last until the end of this year, so we should obey. So do I, it’s about price cut for broadband and ADSL, and I think we don’t have faith and very competitive pressure from the market and we don’t have any plan to do that.

Shu Yeh

Regarding the your question number three, it is used to subject to NTC’s regulation on so-called X factor, and actually have a conversation with NTC regarding this special service, we talked to NTC about not implementing any new reduction on ADSL this year, and the following three years.

Gary Yu – Morgan Stanley

Thank you. Can I – management what is your current non-telecom investment as a percentage of paying capital.

Shu Yeh

73%.

Gary Yu – Morgan Stanley

73%. 73% of your paying capital.

Shu Yeh

Not a 20% of the capital the restriction is 20% of the capital. Current capital is around like NT$77 billion, okay and the maxima amount is 20% of the NT$77 billion, so that means NT$15.4 billion.

Gary Yu – Morgan Stanley

Okay.

Shu Yeh

And 73% of that NT$15.4 billion.

Gary Yu – Morgan Stanley

Okay, got it, thank you.

Shu Yeh

Then let me go to the question number four, first I want to met the distinction currently for the new corporate law amendment we call those are special dividends. So, our Chairman earlier talked about the policy for the special dividend as a supplement in case the dividend is controlled for our law, and however I mentioned about capital management is before those capital management, our plan we have escorted in the last few years, and I emphasize that we need to find source of funding, okay. So, you have to make distinction between these two. And but for a special dividend type, we still have some cash balance, we still have some reserve for that, but it depends how [involved], so these are the two different kinds of issues. Thank you.

Operator

The next question is Sydney Zhang from Merrill Lynch. Please go ahead.

Sydney Zhang – Bank of America/Merrill Lynch

Hi, I have four questions relating to your mobile network. One is on your smartphone, what’s the average usage per smartphone user per month? Second question is on your mobile network. What’s the network utilization rates right now? Third one is that you have a big increase in the mobile network CapEx, so how many new sites, new sale sites are you adding this year? And lastly, your 2G Spectrum, saw your earlier slides that is saying your 2G license are expiring on 2012 and 2013, so how much are you spending this year to expand this license, and what’s your plan to reform some of those spectrum in the future, in few years? Thanks.

Shaio-Tung Chang

The usage, average usage for smartphone is 1 giga.

Shyue-Ching Lu

The mobile network utilization rate, this really depends on the location. For certain hot zone or hot area, it’s relatively high. But in certain areas, especially in the rural areas (inaudible) not have utilization rate is low. The average utilization is not really that high, but the customers will complain when transition occurred during very special area or special peak period, that caused the issue here. So, as we represented in large, our capacity of those hot zone or hot area, hot spots.

Sydney Zhang – Bank of America/Merrill Lynch

Maybe I’ll ask it in a different way that, so for your on average select how many percent of the sites that have used the second carrier, and how many percent of the sites that has already deployed a third carrier?

Shyue-Ching Lu

I understand that – we in certain situation, we make use of the third carrier, but not everywhere, and that don’t have to be percentage with me here. The number of base stations to be added this year for those who is HSPA+ it’s about 4,000, and we keep monitoring the coverage and the – new sites wherever its possible.

Sydney Zhang – Bank of America/Merrill Lynch

So this 4,000 sites are around the existing sites, right?

Shyue-Ching Lu

The more densed populated area, yes.

Sydney Zhang – Bank of America/Merrill Lynch

Okay.

Shyue-Ching Lu

Our 2G right as you know, our government now, our agency is now working on extending the licensing period until 2017. So, we have already submitted our proposal to extend as is in period. And the main thing is CapEx well; we have to maintain the quality of service, so we sometimes need to replace certain base stations, which has been impressed for several years, okay. And all those are included in our CapEx trend.

Sydney Zhang – Bank of America/Merrill Lynch

Okay, thanks.

Shyue-Ching Lu

Thank you.

Operator

The next question is Piyush Mubayi from Goldman Sachs. Please go ahead.

Piyush Mubayi – Goldman Sachs

Thank you, I just have one question. What is your current FTTH home passed number, and what do you target in three years? Thank you.

Shyue-Ching Lu

If we really talk about the home passed number, I believe you’re referring to cable penetration and the – in cable network home pass is – (inaudible) being discussed and in our IPTV or MOD offered in, we gave telecommunication network and it’s really our broadband subscribers, it’s the subscriber in a list of HD TV kind of quality then it’s 10 megabits per second or higher, excess speed is required. So, in referring to the home pass number it’s due to the penetration of our broadband subscribers risk so that minimum (inaudible). So it’s different, a little bit different from the cable industry’s penetration consideration.

Piyush Mubayi – Goldman Sachs

Okay. So, I presume that when you mention fiber, for example on slide 10 you got a chart showing your fiber count rising for 434,000 to 1.034 million in 2012. And these would be customers who can get fiber speeds in excess of 50m on fiber. I presume this will rise quite significantly in two or three years and this is one of the reasons why the CapEx – any opinion is going to remain high for the next two or three years provided there is demand. Now, if I can put the question in another way, what is the percentage of customers today who can get speeds in excess of 50 mbps on your broadband network?

Shyue-Ching Lu

The highest speed is required in fiber solutions and especially for those have hired in 50 mega bits per second coverage. And that we too have a plan, you know to [draw] out fibers. If we have demands from the market, currently the penetration rates is kind of relatively low at this stage, but we are able to respond to market demand if we see that demand. We will categorize in three [apex]; one is, the fiber is already there in the field and then we are able to offer the service within one week.

Piyush Mubayi – Goldman Sachs

Okay.

Shyue-Ching Lu

And the second category is we are able to offer the service within three months. And then it’s not yet. We need to take the [laws] and lot of (inaudible) and then it requires more time to offer the service and we are working on this.

Piyush Mubayi – Goldman Sachs

Okay. So, if you’re – based on that one week definition three month definition, if you were to combine those one week and three months, what percentage of homes in Taiwan can get fiber services within three months?

Shyue-Ching Lu

I’m sorry. We do not disclose these kind of for you.

Piyush Mubayi – Goldman Sachs

All right.

Shyue-Ching Lu

Okay. If there is no more questions thank you very much joining us on the results of 2011.

Operator

Thank you Shyue-Ching Lu. Thank you for your participation in Chunghwa Telecom Conference. There will be a webcast replay within an hour. Please visit www.cht.come.tw/ir under the In Focus section. You may disconnect now. Goodbye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Chunghwa Telecom's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts