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Chunghwa Telecom Co., Ltd. (NYSE:CHT)

Q1 FY08 Earnings Call

April 29, 2008, 6:00 AM ET

Executives

Shyue-Ching Lu - President

Joseph C. P. Shieh - Sr. VP and CFO

Feng-Hsiung Chang - Sr. VP

Fu-fu Shen - IR

Analysts

Shirley Tse - UBS

Danny Chu - Lehman Brothers

Anand Ramachandran - Citigroup

John Kim - Merrill Lynch

Kathy Chen - Goldman Sachs

Mitchell Kim - Morgan Stanley

Operator

Good morning, ladies and gentlemen, and welcome to the Chunghwa Telecom Conference Call for the company's first quarter 2008 operational results. 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 session.

Now, I would like to turn it over to President Lu, the host of the conference. Thank you. And President Lu, please go ahead.

Shyue-Ching Lu - President

Thank you, operator. Good evening, everyone. This is Shyue-Ching Lu, President of Chunghwa Telecom. I would like to thank you all for joining our first quarter 2008 earnings results conference call. On today's call, Dr. Shieh, our CFO; and our Senior Vice President, Mr. Chang, will go over our financial results and the business operations. Then I will review our near-term strategic outlook. At the end of the presentation, we will be happy to take your questions.

Before I hand it over to Dr. Shieh for financial overview, I would like to discuss the capital reduction program for this year. Originally, we had hoped to come to a resolution of our April Board meeting. However, as you may know, Taiwan has recently completed its presidential election. So a new administration will officially start on May 20th. Given that government is still one of our major shareholders and we expect to initiate a battle with the new administration regarding our capital reduction program. I want to emphasize again that management is strongly committed to the capital reduction for the benefit of our shareholders and we will do our best to communicate with the… the importance of this program to the new administration for their support.

Please note our Safe Harbor statement on slide one. Dr. Shieh will now continue with our financial overview. Dr. Shieh, please.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Preside, Lu, before I start formal presentation, I would like to discuss three developments. First, beginning in 2008, Chunghwa Telecom will report our financial results in ROC GAAP only and provide the consideration between ROC GAAP and U.S. GAAP for net income and the stockholders equity. The consolidated financial statements under ROC GAAP will be prepared every quarter and we plan to publish the consideration information every quarter in 2008. Please refer to our 6-K document filed on April 25th for details. Finally, I want to provide an update on our derivative contract. As of March 31st, 2008, based on the stock exchange rate of NT$30.40 per U.S. dollar, our mark-to-market unrealized loss was NT$3.08. Since the inception of this contract, the cumulative cash inflow as of March 31st, 2008 was above NT$50 million. Please refer to slide 21st... 21, the appendix of this presentation for sensitivity analysis.

Please turn to slide 22. You may see from… the upper table on this page shows sensitivity analysis by showing our mark-to-market unrealized loss for derivative contract as of March 31st, 2008 given the difference exchange rate scenarios between the Taiwan and the U.S. dollars. The lower table shows the sensitivity analysis of the estimate of the future cash flow calculated as the sum of all cash payments we must make through [inaudible] of this country. As of March 31st, 2008, given the difference exchange rate scenario between the Taiwan and U.S. dollars, please be advised that the variation of mark-to-market unrealized loss fluctuates depending on the stock price theory of exchange rate, interest rate spreads, stock price and the residual tenure [ph] of the country.

Now, let me start my presentation on financial review please [inaudible] for the first quarter 2008. Now turn to slide three, showing [inaudible] income statement. Our total revenues for first quarter 2008 were NT$51 billion, which was 12.1% increase year-over-year. EBITDA increased 4.4% to NT$26.1 billion. Operating profit increased 9.2% to NT$16.4 billion, and the net income amounted NT$10.7 billion representing a decrease of 11.4%. Growth of our revenue was mainly driven by the consolidation of our subsidiaries such as SENAO and CHIEF. In addition, our Internet and Data and the Mobile business all contributed positively.

Operating cost and expense increased primarily due to the consolidation of our subsidiaries. The increase of cost and expense from parent company is very small as compared to the impact from subsidiaries. While operating profit grew 9.2%, our net income decreased 11.4% in first quarter 2008 year-over-year due to the mark-to-market unrealized loss of the foreign derivative contract.

As shown on slide four, total operating cost and expenses for first quarter 2008 was NT$34.5 billion, increasing 13.6% when compared to first quarter 2007. As I mentioned in the previous slide, the increase was mainly from our subsidiaries. For parent company, total operating costs and expenses increased by NT$12.42 [ph] billion, representing year-over-year increase of 1.4%. The increase was primarily attributed from the increase of maintenance fee, expense of telecom material, interconnection fee.

On slide five, we showed a revenue performance for each individual business segment in the first quarter 2008. Internet revenue and the data revenue continued to increase due to increased broadband subscriber numbers and the successful initiatives to upgrade customer to higher speed ADSL and FTTB services. [inaudible] Mobile market mature with the managed 0.3% revenue growth year-over-year. In the Fixed-Line business, local and domestic long distance revenues decreased by 1.3% and 4.4% respectively year-over-year, mainly due to Mobile substitution. International long-distance revenues increased by 6.4% compared to first quarter of 2007, mainly due to the increase in wholesale revenues and the international settlement income. Other revenue increased 643.0% from the consolidation of the [inaudible].

Slide six shows our cash flow performance. Our cash flow from operating activities increased 19.5% to NT$18.6 billion. The increase of it was primarily because of the increase in accounts payable. Free cash flow for first quarter 2008 increased 20.2% when compared with first quarter 2007, and the increase of CapEx was smaller than the increase in cash flow from operating activities.

Next on slide seven, CapEx for first quarter 2008 was NT$5.5 billion, an increase of 17.5% year-over-year. This was mainly due to an increase in other spending of NT$1.2 billion for land purchase of state-owned land [inaudible] location. Going forward, our CapEx may increase due to investments focused on our core business and are able to migrate Mobile and the Data customers to higher revenue platforms including 3G, 3.5G systems; IP plays, NGN, FTTx, and xDSL.

Slide eight shows our focus for 2008. Please be advised that this focus is only for Chunghwa Telecom, the parent company. Revenues for 2008 are forecasted to be NT$185 billion, an 0.7% decrease year-over-year as compared with our 2007 revenues, mainly due to the tariff reduction of Mobile and ADSL services regulated by SEC and the protection that alternative VoIP service providers will start their business this year. Operating cost and expense is estimated to be NT$128.2 billion, increasing by 2.3% year-over-year. Although our personnel expense and D&A are expected to decrease, we project that our marketing expense, commission for agencies, outsource expense and professional service expense will increase. Furthermore, our focus includes mark-to-market loss of [inaudible], which is estimated according to amount as of March 31st, 2008.

This completes my financial presentation. I will hand over to Mr. Chang for our business overview.

Feng-Hsiung Chang - Senior Vice President

Thank you, Dr. Shieh. Now, let us move onto business operational details. On slide ten you can see the Chunghwa Telecom's total revenue for first quarter 2008 was NT$51 billion, of which 28.3% came from Fixed-Line, 35.6% from Mobile, 24.6% from Internet and Data service and 11.5% from other, which includes a new revenue stream of handset sales as we consolidated them now. Revenue from handset sales, including handset sales from SENAO and Chunghwa, accounted for 9.1% of our total revenue. As a result, revenue for the Fixed-line, Mobile and the Internet and Data as a percentage of our total revenues decreased due to the new revenue stream. Chunghwa has a commending marketing position for all of our business segments.

As of the end of first quarter of 2008, we had 8.7 million mobile subscribers, representing 35.7% of the market. Our Internet and Data service, our ISP market share was 58.2% and our broadband subscribers accounted for 58.8% of the market. On Fixed-Line side, our local call subscriber market share was 97.4% and the market share for our domestic and international long-distance calls in terms of minutes were 87.5% and 60.5% respectively.

Next on slide 11, our broadband subscriber number continues to increase. Among the 4.28 million broadband subscribers as of first quarter 2008, plenty of them use services with speed higher than 2 megabits per second. Total broadband access revenue was approximately NT$5.1 billion dollars, which was 2.3% higher than that for the year before. We expect the growing trend of the broadband business to continue.

Now, as shown on slide 12, some of our initiatives for the broadband business is to migrate our customers to higher access speed and to continue to increase our coverage by deploying fiber network in residential buildings, campuses and the commercial buildings, allowing more opportunities to access and adopt a variety of Internet value-added service. These initiatives have demonstrated a substantial progress. As you can see on the left side of the slide, the average bandwidth per user continued to increase over the last few years and has reached 3.7 megabits as of the first quarter of 2008. In addition, about 1.3 million broadband subscribers utilized a service speed of at least 8 megabits per second, representing about 30% of our total broadband subscribers. The number of fiber subscribers also showed strong growth with 635,000 subscribers at the end of first quarter 2008. In addition, I would like to emphasize that the 15.8 [inaudible] fiber access service we offer to represent about 90.4% market share. Going forward, we expect that this growing trend for our broadband business to continue.

Chunghwa Telecom has maintained its number one mobile market share position as shown on slide 13. At the end of first quarter 2008, we had 8.67 million mobile subscribers, including 2.6 million 3G customers. The number of 3G subscribers as a percentage of the total mobile subscriber base continued to increase during the last year. During the last year, we were encouraged by our mobile value-added service growth, primarily due to our exclusive mobile value-added service platform, emome. Among these services, total value-added services and the mobile Internet exhibited 35.3% and 54.7% year-over-year growth respectively. As a result, data revenue as a percentage of mobile revenue increased to 9.5% of the… for first quarter 2008.

Moving to slide 14, I want to provide some more details on our 3G initiatives for our mobile businesses. We had 2.6 million 3G subscribers at the end of first quarter 2008, of which 63% utilized 3G handsets. 3G ARPU was 61% higher than 2G ARPU, primarily as a result of our innovative 3G strategy for customized handsets and the promotion of mobile office services. We offer a customized 3G handset, the HD 3000, since January 24 of this year, targeting students and the price sensitive customers. There were more than 23,000 users now.

Priceless roaming is a new value-added service we provide to corporate customers who travel across states or abroad. By subscribing these services, customers could receive international calls and short messages without roaming payment. As a whole, our 3G mobile data usage increased 249% year-over-year, demonstrating the effectiveness of our strategy.

Next on slide 15, for our Fixed-Line businesses, our international calling card traffic increased year-over-year in first-quarter 2008. For the whole year, the number of minutes increased by 3.2% as compared to first-quarter 2007. Far the past several years, we had a stable market share for local DLD and ILD businesses. As incumbent [ph], we were successful at funding our Fixed-Line market share and are confident that our strong market position will continue in the future.

Moving to slide 16, let me update you on some of our progress in meeting customer demand for convergence services. First, we are continuing our effort in constructing a user-friendly platform and in reaching the content. This platform includes MOD for IPTV, emome for Mobile service, and hiChannel for ISD service. By the end of first quarter 2008, there were about 435,000 IPTV subscribers, a growth of 10% as compared to that at the end of 2007. Currently, we have 57 IPTV channel for MOD service. We provide the movie titles from major Hollywood studios, games from major league baseball and so forth. Movie titles we publish per month are over 5,000 hours. In addition, we have contract with largest animation content provider in Taiwan, My Cartoon, and expect that their participation could enrich our content.

Furthermore, we are focusing on promoting sports programs including Olympic Games and MLB over these three platforms. We also keep enhancing content of other VOD and providing interactive value-added services such as games, karaoke and exclusive services for covered customers. To provide high-quality services, HDTV programs will be available for Beijing Olympic Games, documentary, drama sports.

This completes my business review, and I will pass to Dr. Lu for our business strategy.

Shyue-Ching Lu - President

Thank you, Mr. Chang. Next, I want to take a few minutes to discuss our business strategy. On slide 18, we highlighted the key aspects of new income strategy. First, our strategy for core businesses is as firm as before, including migration of our high-end broadband customers on to a fiber network, encouraging usage of mobile Internet, construction of NGN and conducting cross-platform service operation. On top of NGN, we would provide remote video monitoring service, [inaudible] communications, and some of the telemetric services to make the best use of IP-based features.

Second, we would continue to explore opportunities for M&A and strategic alliances. Third, we will monitor our CapEx and expenses carefully for better cost control. Four, as seen on slide 19, as an [inaudible] priority, we want to devote ourselves to enhance efficiency for utilizing energy such as gasoline, electric power and papers [ph].

Finally, we remain fully committed to maximizing value for our shareholders through capital management, cash advancement... investment and property development. As for property, we work to develop our land to create asset value through rezoning as well as reviewing the status of our switch offices in order to sit some of them aside for future development. However, the process should be gradual. Hence, revenue contribution from the property side is estimated to be minimum as compared to core business in the next three years.

Now, I would like to further disclose the status of our [inaudible] to our subsidiary. Please refer to our appendix on slide 23 and 24. Now please turn to slide 23. Our 100% owned property subsidiary was established in February this year. [inaudible] to subsidiary are mainly zone for residential purpose, are now to be sold out upon construction finished. As for those land zoned for commercial purposes, it would be remain Chunghwa owned and will be leased upon construction finished. In the meantime, we are continually doing our real estate utilization to set aside for future development or lease. [inaudible] we expect get some of our lands rezoned in compliances with urban planning of individual local government.

On slide 24, the upper table shows our total land and building properties for your reference. Currently, we have 410 hectares or 4.1 million square meters of land, of which book value is around NT$110 million as of the first quarter of 2008 [ph]. In addition, we have 1,764 buildings to maintain about 3.98 million square meters and book value is around NT$40 billion. The lower table illustrates the land properties that we have transferred to our subsidiary, LEDC. Through the first batch, we’ve transferred five properties in last February including three in Taipei City, one in Taipei County and one in Central Taiwan. Total dimension for these five properties is about 15.5 thousand [ph] square meters. For the second batch, we transferred another property in Taipei City in mid April of which the dimension is about 900 square meters. For the three of the five properties we transferred through the subsidiary in the first batch, we have already selected two developers for co-development to build residential buildings. We are still exploring opportunities to cooperate with other developers for the rest of the properties. For the aforementioned six pieces of land, we expect to book about NT$5 billion of revenue in three years depending on the pace that the individual project is finished.

That concludes our presentation. We are now happy to take your questions.

Question and Answer

Operator

[Operator Instructions]. Your first question comes from the line of Shirley Tse with UBS. Please proceed.

Shirley Tse - UBS

Hi, thanks very much for the call. I want to... first question is relating to your forecast. Having achieved around 27% of your full-year targets in EBITDA and 25% revenue at the parent level, what are the areas in terms of operating cost that you believe in the second half and also the second quarter that will be weighing this down, given this relatively good results in the first quarter? And secondly, I was wondering if you would also look into moving your service centers located in the prime locations within Taipei City as well in terms of developing for land value rather than just focusing on the switch offices? And thirdly, you mentioned that most of the lands have been zoned for residential purposes, is that still relating to the 10% that you quoted previously?

Shyue-Ching Lu - President

Your first question is about our guidance for this year, right, and for the second half of this year I think we’re still enjoying the human resources reduction since we have early retirement program in the previous three years and we still enjoy the benefit of that. So, this is about [inaudible] causing the increase. Can you say again your second question?

Shirley Tse - UBS

Follow-up to your answer just now, so given that you've already achieved 27% of EBITDA in the first quarter, do you think that your guidance could be slightly on the conservative side?

Shyue-Ching Lu - President

Let me try to answer your question. The cost for this year, because of certain changes in accounting… the ERP expense for this year we projected about NT$0.5 billion and for employee benefits about NT$1.2 billion. These are the items used to be in the others, other expense, not included in the operating expense. And also this year… starting this year the participation of dividend to increase… used to be the distribution of dividend, but starting from this year it's going to be expensed. So that amounts to about NT$1.4 billion. So all of this adds up additional cost for this year. That's part of the reason that the EBITDA is slightly less than what it used to be. If we add this back, then it would be about the same as the previous year, okay.

Your second question related to the property development and your question is, are we focusing on Taipei City--?

Shirley Tse - UBS

Sure. I notice you have a lot of service centers within the Taipei City area in some in the prime locations. I was wondering if you will also consider relocating some of these service centers, so… and then reserving these areas for redevelopment in addition to just developing… just focusing mainly on the switch offices?

Shyue-Ching Lu - President

Well, the company remains focused on our core business, okay. So, service is very... service centers are very important for us to communicate or to interact with our customers. So, actually we are extending our service locations so that we will be better get in touch with our customers. One way for us is to find locations for ourselves through our subsidiaries to acquire better locations to serve our customers. So, we are not eliminating our service centers and try to develop the land for that purpose. Instead, actually we are creating our next-generation network and consolidate many of our network elements. So, this will give us opportunities to maybe set aside some locations or some [inaudible] for other use that may help to create some value, yes.

Shirley Tse - UBS

Sure.

Shyue-Ching Lu - President

And your third question is, please… that's included, yes. The [inaudible] you mentioned, those are included in what we've discussed before in that 10% of land that can be developed.

Shirley Tse - UBS

And how long will it take for this 10% land to be injected into your property subsidiary?

Shyue-Ching Lu - President

As I said in the presentation, this process is to be gradual and we presented that for this project already being transferred to our subsidiary in three years, if everything goes according to the schedule, maybe we will finish this project. And for the rest, we will build and gradually transfer to the subsidiary for development. We don't have a definite timetable for each piece of the land, but we will review that from time to time. Okay.

Shirley Tse - UBS

Okay. Thanks very much.

Shyue-Ching Lu - President

Okay. Thank you.

Operator

Your next question comes from the line of Saloni Hu [ph] with Lehman Brothers. Please proceed. Hello, your line is open, Saloni, please proceed.

Danny Chu - Lehman Brothers

Hello?

Shyue-Ching Lu - President

Please.

Danny Chu - Lehman Brothers

Yes. I'm Danny Chu from Lehman Brothers. Just got three quick questions. First, a follow-up on the property development, so in terms of the guidance we expect year 2010 is the first year that you would start record revenue from all these residential property development projects, is it year 2010?

And then the second question is… first, thank you clarifying in terms of the management commitment to [inaudible] in terms of a capital reduction plan, but can I check as when is the next, I mean Board of Directors meeting date, given that I believe your AGM day is June 19th? So, if the next Board of Directors meeting couldn't reach a decision on capital reduction, then I should expect that probably we have to wait till after the AGM and other Board of Director meetings and then an AGM will be held to kind of like to approve the capital reduction. So, more clarification on that particular issue will be greatly appreciated.

And then, the final question is, can you elaborate a little bit more on overseas expansion plans? Should we expect Chunghwa to announce I mean any public major overseas expansion plan this year in 2008 or the company is still evaluating all different possibilities at this point in time? Thank you.

Feng-Hsiung Chang - Senior Vice President

Yes. I think I will start from the year 2011 and we will start recurring the proceeds from all our land development that we transferred to the subsidiaries, yes, start from 2011 year. We estimated for those six projects that we transferred to subsidiary start from, as I mentioned, 2011 we are about NT$5 billion.

Shyue-Ching Lu - President

Our next Board of Directors meeting would be in June... late June, okay, after the AGM, okay? And for the capital reduction, as I said earlier, the first item I mentioned during the presentation, the management is strongly committed to improve our capital structure and the shareholders’ value. And we will continue to pair-up with the administration, and since probably you're already aware that the new minister for MOTC is Captain Mao… he used to be our Chairman during year 2000 and early 2003. He is the Chairman who set various propositions for this company to be very creative for shareholders, for employees and also for customers. For IPD, it’s highly likely that he is supportive of such initiatives to improve our capital management... to implore our capital and programs like this we believe is highly likely to support this, but it's the timing, okay. And when we have more clear information on this we will let you know.

And your third question is related to the overseas activities. The company always view overseas expansion as an opportunity, but we are very potent in assessing the opportunity, okay. We will start with more projects and to find... to actually… to run some experience in operating in other countries. So, other than one more specific investment we will announce in few days, we do not have any specific target at this moment.

Danny Chu - Lehman Brothers

With regards to last payment, so we should expect the company to make some announcement in the next few days, when you see like the company will know about specific investment in the next few days?

Shyue-Ching Lu - President

It's a very small joint venture, okay, and we expect to have announcement in a couple of weeks.

Danny Chu - Lehman Brothers

Thank you.

Shyue-Ching Lu - President

Okay. Thank you.

Operator

Your next question comes from the line of Anand Ramachandran from Citigroup. Please proceed.

Anand Ramachandran - Citigroup

Yes, hi. Good evening. Thank you so much for the call. I had three questions. Firstly, on dividends of 2007 earnings, I was reading press reports about NT$4.26 in cash dividend and then a transfer of capital surplus of 10% followed by usual capital reduction like you did last year. Now, I mean I haven't been able to find a confirmation there. Could I bother you to just confirm that or talk about what your dividends would be for 2007 earnings?

Secondly, you mentioned on your call that you would look to engage with the new administration effective May on what to do about further capital management strategy that again complements on your commitment. My question is more on time. If you're starting the dialogue in May, would it probably be realistic to assume that implementation is probably more a 2009 game plan rather than something that can be done in 2008?

My third question would be on the Land Bank, Mr. Sheih you mentioned NT$5 billion in revenues. Now, does this arise from what you mentioned at the lands transferred to LEDC, i.e., about 15,500 square meters odd of land, which is what you assume will result in the NT$5 billion in revenues. And secondly, by 2010 or 2011, what do you anticipate LEDC's Land Bank as being? Do you anticipate it as being same or is it going to be four times this or five times this? Thanks.

Shyue-Ching Lu - President

Yes, about dividend policy, this year if we pay high dividend payout ratio to our shareholders and the dividend for this year is… as we formerly announced in our… at our Board meeting, is $4.36 per share. We think that NT$4.26 is cash dividend and NT$0.1 is stock dividend, so that the payout ratio is pretty high, I think it scrolled to 90% payout ratio.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

The payout ratio is about 84%, 86%… 85 point something, close to 86%, okay, because we set aside 4% for our employees.

And your second question is related to timing for capital management and I'm sorry I cannot be more specific than what I've just said. And actually we do need consensus support from the new organization. So we will let you know as far as the timing is concerned.

And your third question is related to the NT$5 billion I said... I mentioned about for the land development. Those are from the six pieces of land we have already transferred to the subsidiary. And that will be... the process will be in our book along 2011.

Anand Ramachandran - Citigroup

So should we expect that no more land will be transferred to the subsidiary till 2011 or is this a continuous process?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Well, as I said in answering previous questions, the company will review the land... availability of land for transferring to LEDC from time to time. So we are not limiting ourselves for three years, six pieces of land, not a limitation, okay, not a constrain.

Anand Ramachandran - Citigroup

Okay. And a quick follow-up, last year we saw a stock dividend... a business stock dividend followed by a capital reduction, a 10% limit transfer obviously come from it. You don't need any regulatory approval for that. Should we expect you to follow through with same process through this year?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Well, as we have disclosed earlier that the company is very much concerned about the cash… 10% cash transferred in capitals across to capital and the regulation has been lifted and so we have no [ph] freedom to set, if possible, higher percentage of transferring from capital across to capital.

Anand Ramachandran - Citigroup

Okay. And lastly what's the logic in the NT$0.10 stock dividend? I mean was there a particular reason for that? I apologize for my continuously asking so many questions.

Fu-fu Shen - Investor Relations

Anand, this is [inaudible]. Basically, this is transferred from the earnings, okay. So, this is going to be distributed to shareholders.

Anand Ramachandran - Citigroup

Okay.

Fu-fu Shen - Investor Relations

So this is not for ready to the capital reduction like what we did for last year.

Anand Ramachandran - Citigroup

Yes, I don’t know. I was just trying to ask the... is there a reason, which I am missing behind the stock dividend of $0.10 per share?

Fu-fu Shen - Investor Relations

You see, according to Taiwan's regulation, every time we want... the company want to distribute stock dividend to our employees, we have to distribute to the shareholders as well.

Anand Ramachandran - Citigroup

Okay.

Fu-fu Shen - Investor Relations

So that should [inaudible].

Anand Ramachandran - Citigroup

Understood. Thank you so much for your time. Thank you.

Fu-fu Shen - Investor Relations

Welcome.

Shyue-Ching Lu - President

Thank you.

Operator

Your next question comes from the line of Scola Wan [ph] with Morgan Stanley. Please proceed.

Unidentified Analyst - Morgan Stanley

Hi this is Scola Wan from Morgan Stanley. I just have one question. Could you just highlight the possibility of further capital reduction in this year, just wondering, is there any potential size of the capital reduction in mind?

Feng-Hsiung Chang - Senior Vice President

Well, we will communicate the results to shareholders… major shareholders and decide on the size of the project okay. We have no... I cannot give you more specific than this okay. Thank you.

Unidentified Analyst - Morgan Stanley

Thank you.

Operator

Your next question is from the line of John Kim with Merrill Lynch. Please proceed.

John Kim - Merrill Lynch

Yes. Thank you very much for the call. I have two questions, first pertains to your land. Do you expect the focus of your land redevelopment to be more residential? And if you have any views on whether the value of your property redevelopment project will fluctuate depending on the mix of residential versus commercial that will be great.

And second is on your MOD service. I understand that you're making a lot of enhancements to your MOD service. What kind of ARPU expectations do you have and as well as for revenues for this business by the year-end? And if you can also share with us what's the coverage ratio as percentage of your broadband subscribers currently who are able to receive your MOD service, I would appreciate it. Thank you very much.

Shyue-Ching Lu - President

Yes. For the land development, I think that we have already stated our strategies. For those residential project, we will develop it and cooperating with outside major contractor and for those residential project, we will be sorting out to the buyer. But for the commercial project, we will... leasing to the company and also occasionally to the individual to get rental payments and keeping ownership for those commercial lands. And for... looking forward, I think the problem for those developing project, probably more than 70% will be on residential versus commercials. Thank you.

Shyue-Ching Lu - President

Okay. On our MOD operation, we have enhanced the quality of video telephony and also enriched the contents. With the approval of our best rates, NT$89 per month, our ARPU currently stands around NT$100 and we believe this is the beginning of... early stage of the service introduction. And with more contents available, we would like to see higher ARPU in the near... in the future, okay. For the coverage, we... about 50% of the customers… our broadband customers can have the service. And the company also started offering HD transmission... HD quality… high definition quality for the customers who have fiber-to-the-x solution and the picture quality is fantastic. If you are in Taipei we will show you.

John Kim - Merrill Lynch

Thank you.

Shyue-Ching Lu - President

Okay. Thank you.

Operator

Your next question is from the line of Henry Cob with Nesky [ph]. Please proceed.

Unidentified Analyst

Hi, there. Thanks very much for the call. Just a couple of questions, you mentioned the changes in accounting treatment of the employee benefit of NT$1.2 billion and the NT$1.4 billion bonus expense that used to be a dividend distribution. So could you confirm on a... the operating profit level or the net profit level there is actually no difference than in the economic basis between your previous and your current reporting methodology?

And secondly, you stated the property division `would have income of some NT$5 billion over three years. Is that NT$5 billion per annum every three years or NT$5 billion over three years or NT$5 billion in three years’ time? Thank you.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

That will be the NT$5 billion over three years’ time, yes, for the property development.

Unidentified Analyst

NT$5 billion per annum in three years’ time?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

No, not per annum, no, it is the total.

Shyue-Ching Lu - President

Total, yes.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

It’s the total for the six pieces of land that we have transferred, not… please don't talk NT$5 billion per annum, that's no, okay. So, it's NT$5 billion total. Okay.

Unidentified Analyst

Okay. NT$5 billion in three year’s time.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Okay. Thank you.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

And the accounting treatment... different accounting treatment, that is for the operating... to deploy the operating results, okay. And for this year please, you should be aware of the potential mark-to-market growth. [inaudible] that's still huge up on us. And for this forecast we present today, in this forecast we pick the mark-to-market growth as of March 31st of this year as reference because the fluctuations and also the dynamics in the financial markets will change numbers. So to be safe, the best we can do today is to take the March 31st number for reference. Okay?

Unidentified Analyst

Okay, but in the forecast do you exclude or include the derivative loss?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

In the forecast, the net income includes the mark-to-market loss… unrealized loss of about NT$3 billion. Okay.

Unidentified Analyst

Okay. So, you take the loss at the end of March and you annualize the NT$3 billion per annum and use that in your forecast?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Yes.

Unidentified Analyst

Okay. And could you just confirm the accounting change about the employee benefit and the bonus that as you know impacted on the economics, are these the same numbers as last year but was reported differently?

Fu-fu Shen - Investor Relations

You see the number actually, we [inaudible] for the employee bonus 3.5% of the net income, so it should be the same, okay. As for the... yes, I think that's the same number… same percentage I would say that. But our net income is about the same level, so what you missed… so I would say the same number.

Unidentified Analyst

Okay. And what is your target headcount for the... by the end of this year?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

We do not have... the headcount, excuse me, are you asking about the headcount reduction or --.

Unidentified Analyst

Both. I'm asking about how many... what is the headcount reduction and

what is the total number of employees by the end of the year?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Okay. We are still investigating our human resources distribution and our productivity. As of today, we do not have a specific number to report to your about headcount reduction. Since this is a very intensive work that we are undertaking, when we finish this project we will be able to identify the redundancies and maybe to conduct further early retirement program. Okay.

Unidentified Analyst

And could you repeat just what was the NT$25 billion expense, what do that relate to, early retirement of personnel?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

That we are... in our budget we set NT$0.5 billion for possible expense for early retirement program, okay. So if we... after the assessment maybe we still have the second half to see if early retirement program will be conducted. Okay.

Unidentified Analyst

And so the number is NT$25 billion?

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

No, NT$0.5 billion, 0.4, 0.5, 500 million, okay.

Unidentified Analyst

Okay. So I'm getting that. Okay.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Yes, I'm sorry. I totally confused you, it's a big number. No, it's only NT$400 to NT$500 million.

Unidentified Analyst

Okay. Thank you very much indeed. Thank you.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

Okay. Thank you.

Operator

Your next question comes from the line of Kathy Chen with Goldman Sachs. Please proceed.

Kathy Chen - Goldman Sachs

Hi. I have four questions. Firstly, Can you site any guidance for the 2008 figures on total consolidated basis in terms of total revenue and consolidated EBITDA margin? Secondly, can I check what is the maximum dividend payout possible in 2008, given that we had the share buyback cancellation happen in the first quarter, so the payout should be a little bit lower than the usual maximum?

Third question is on the regulation side, could you share any updates on expectations of any regulatory impacts, given the new MCC will be coming in and I think there has been some changes on the new convergence act?

And then lastly, again on the issue, do have any guidance on how much land can be freed up say over the next five years with the next-generation network or another way to put it, how much of the switches can be reduced? Thanks.

Shyue-Ching Lu - President

Well, the guidance… the forecast we offer is for the parent company only and we do not have consolidated numbers for you. If you really want them, I can only give you a reference, okay, for the consolidated revenue dropped by NT$200 and 4 or 5 billion altogether. And I... this is the number that's available to me, just for reference, okay. This is just for your reference, okay.

Kathy Chen - Goldman Sachs

Do you have a rough margin guidance?

Shyue-Ching Lu - President

No, margin guidance for the consolidated numbers, okay.

Kathy Chen - Goldman Sachs

Okay.

Joseph C. P. Shieh - Senior Vice President and Chief Financial Officer

I am sorry, the payout... the dividend payout ratio, since we undertook the buyback... share, total buyback last year and those shares has been [inaudible] the beginning of this year. So, this [inaudible] effect we expect next year’s dividend payout, not this year. But that will only affect [inaudible]. Thank you.

Shyue-Ching Lu - President

And your third question is related to the regulatory, the new MCC. Well, my understanding of the issue is probably the same as you too and I don't have any information about who will be the new commissioners. And so it's very difficult for me to give any sensible answer to this question. So we are going to see if new commissioners are nominated and approved by the [inaudible]. So we'd be in better position for understanding the attitude or the policy corrections of the new MCC.

And your last question is about the land. Well, in an earlier question, whether we would transfer more land to our subsidiary for development and from our previous discussion, we said we have about 10% of the land available for development and currently we have only 66 being transferred. So, there are still rooms for us to identify certain properties and transfer to the subsidiary for development. So, this will take a while for the subsidiary to develop really, okay. So, whether we are able to find new places as we move between our NGN, certainly if this can be so arranged that we... new buildings or new space are available for development we will do so.

Kathy Chen - Goldman Sachs

Okay. Actually, I could just ask... sorry, if I could ask one more question on the landing then, of that 10% can you just tell us how much of that is in Taipei?

Shyue-Ching Lu - President

Taipei nearly accounts for about 20% of our total land, okay. And of course the value is higher in this area.

Feng-Hsiung Chang - Senior Vice President

At least I can give you a number, you might be appreciating me, for this 10% land available for development 50% of this 10% is located in metropolitan area including Taipei and Taipei County, Taoyuan, Taichung and Keelung [ph] City.

Kathy Chen - Goldman Sachs

Okay. That's very helpful. Thank you.

Shyue-Ching Lu - President

Thank you.

Operator

Your next question comes from the line of [inaudible] with GIC. Please proceed.

Unidentified Analyst - GIC

Hi, thanks for the call. Just a couple of questions on your broadband. I think in your presentation, you quoted a 3.7 megabit per second average bandwidth at the end of March, '08 per broadband subscriber. Where would you hope that to move by the end of this year? And the second question is again on the same slide. I think you quoted about 30% of your total sub-base has access to speeds of over 8 megabits per second, again where would you expect that percentage to move to by the end of this year?

Shyue-Ching Lu - President

This is really a good question.

Unidentified Analyst - GIC

I'm just trying to get handle on the broadband subs who will be available.

Shyue-Ching Lu - President

Yes. Since we are migrating our customers from lower speed to higher speed and we will continue to do so, and also to promote more MOD subscribers, we're migrating our total users from ADSL to fiber. So the bandwidth certainly will be greatly enhanced as time goes along. Well, by the end of this year our target for the fiber subscribers, FTTx subscribers will be about 1 million, total will be 1 million and towards the end of this year may be average more than above 5 megabits per second, just for your reference, above 5 megabits per second.

And your second question is more detailed than that and… excuse me, you are asking the 30% are above 8 megabits per second and… [inaudible] at the end of the year?

Unidentified Analyst - GIC

Yes. On the same slide you had… you quoted a figure of I think 1.3 million subs in the [inaudible]?

Shyue-Ching Lu - President

Well, the fiber solution will be higher than 8 megabits per second. For those customers, 1 million… I said 1 million. So we can calculate from here the percentage of subscribers to be better than 8 megabits per second.

Unidentified Analyst - GIC

All right. Thank you.

Shyue-Ching Lu - President

We'll get back to you, these are very detailed numbers, okay.

Unidentified Analyst - GIC

Okay. Thanks.

Shyue-Ching Lu - President

Okay. Thank you.

Operator

And your last question comes from the line of Mitchell Kim with Morgan Stanley. Please proceed.

Mitchell Kim - Morgan Stanley

Okay. Thank you for this opportunity. I have three I think quick questions. First is on your impact of your 3G subscribers, I'm looking at your number of 3G subscribers, which looks like in first quarter relative... this year relative to last year you have about twice as many 3G subscribers. And on your slide, you are saying that you are seeing about 61% ARPU growth, yet your mobile revenue is pretty flat. So I'm just wondering how should I be reading this and then why we are not seeing this in revenue growth?

My second question is on your broadband. I was just wondering what kind of churn trends you're seeing on your broadband and whether you could share with us what kinds of churn you are seeing for those that are taking bundling services, whether it's double-play or triple-play?

And my last question is on IPTV, you have been providing IPTV for some time and I was just wondering what kind of margins you're getting on IPTV, both EBITDA and operating profit, if possible.

Shyue-Ching Lu - President

Okay. Let me answer the last question first, okay. As I said, our MOT IPTV operation is still at the early stage and because of the condition cable is very well benefited in Taiwan. And so, we are catching up with cable service and also we are trying to be a differentiator in this service. So it's still very early for us to report on the margins for this business because we would have to see ARPU getting better and also number of subscribers getting better and with always the content would be much, much richer than what we have already been able to offer. So it's the situation that exist, okay.

And the total churn rate is very, very low for Chunghwa Telecom. Our competition is from cable and as of fixed-line operators, we… in broadband access, we have about nearly 85% of the market share. The churn rate is about 1% or less than 1% per month, okay.

Your first question is the mobile operation, the mobile operation, let me first say that the current mobile market is mature and saturated. Out of the three major operators, we have growth in revenue, okay, and also in subscriber numbers. I too need to find some analysis on the issue you raised. The ARPU seems to be better for 3G, much better, 51% higher, and our revenue has not increased in proportion. For example, you have... would you like to supplement this or we would get back to you after some analysis.

Feng-Hsiung Chang - Senior Vice President

Just because I don't have any dedicated figures now, but I think it is primarily because of the competition is very tough here. So we provided a lot of new packages to absorb the customer. So, our new package is different than before. So, I think that's the problem.

Shyue-Ching Lu - President

And we will get back to you with your question, okay, regarding the ARPU and number of subscribers and revenue, okay.

Mitchell Kim - Morgan Stanley

Okay, yes. I just wanted to understand why... it looks like number-wise it should show growth, but I'm just wondering whether I'm reading this correctly.

And just to... on the first question again, so are you saying that you're seeing... you're at break-even on IPTV or… can you share that with us?

Shyue-Ching Lu - President

Well, our estimate for break-even in IPTV operation is something like 2.5 million... about 2 million subscribers and ARPU at around 300 --.

Mitchell Kim - Morgan Stanley

Okay. That's helpful. Thank you.

Shyue-Ching Lu - President

Yes. Total ARPU of about 240, okay.

Mitchell Kim - Morgan Stanley

240, okay. That’s great. Thank you.

Shyue-Ching Lu - President

And Fu-fu will supplement on the 3G operation and the mobile here.

Fu-fu Shen - Investor Relations

Yes, you mentioned about the subscriber number of 3G actually doubled from last year, but the overall revenue doesn't really look to be much better. I think because you look at the presentation here... the slide here, even the 3G subscriber... the 3G operates much higher than 2G, but if you look at the monthly… month-over-month number you'd see that actually the 3G ARPU actually declined month-over-month, okay, so has the 2G. So I think that's probably explained in answer to your question.

Shyue-Ching Lu - President

Okay, that brings... this slide only gives us the partial information. It is [inaudible] from 2G to 3G ARPU, but in considering the revenue and the top line, the ARPU compare with previous... ARPU of previous month. Okay.

Mitchell Kim - Morgan Stanley

I see. I will follow up with you later then. Thank you.

Shyue-Ching Lu - President

Okay, thank you.

Operator

As there are no further questions, I'll turn it back over to President Lu for closing remarks.

Shyue-Ching Lu - President

Okay, thank you very much for your question and participating in this conference call. Thank you so much. Good night.

Operator

Thank you, President Lu. That's all for today's conference call. Replay details will be available on the CHT website at http://www.cht.com.tw/ir. Again, thank you for your participation in today's conference and have a great day. You may now disconnect.

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Source: Chunghwa Telecom Co. Ltd. Q1 2008 Earnings Call Transcript

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