China Telecom Corporation Limited FY08 Interim Results Call

| About: China Telecom (CHA)

China Telecom Corporation Limited (NYSE:CHA)

FY08 Interim Results Call

August 28, 2008, 12:00 PM ET


Ma Yimin - Manager Director of IR

Wang Xiaochu - Chairman and CEO

Shang Bing - President and COO

Wu Andi - Executive Director, EVP and CFO


Ma Yimin - Manager Director of Investor Relations

Good afternoon, ladies and gentlemen. I am Ma Yimin, the Managing Director of Investor Relations of China Telecom Corporation Limited. On behalf of the company’s management, I would like to welcome you all to this presentation for the 2008 Interim Results. This presentation will be conducted in Mandarin with simultaneous English interpretation.

Consecutive interpretation will be provided in Q&A section. Please be reminded to set your cell phone to silent mode or switch it off during this presentation.

First of all, may I introduce the management of our company, Mr. Wang Xiaochu, Chairman and CEO; Mr. Shang Bing, President and COO; and, Madam Wu Andi, Executive Vice President and CFO. Thank you for coming and hope you find this presentation useful.

I will now invite Chairman Wang to give you an overview of… on the overall performance of the company in the first half of ‘08.

Wang Xiaochu - Chairman and Chief Executive Officer

Good afternoon, ladies and gentlemen. I’m very pleased to meet you all within this short period of time and introduce to you the company’s results in the first half of 2008. This presentation is divided into three sections. First of all, I will introduce the overall performance. This will be followed by Mr. Shang and Madam Wu who will present to you the business performance and financial performance, respectively.

In the first half of ‘08, the MIIT, NDRC, and Ministry of Finance issued the announcement on the beginning of the institutional reform of the telecommunications sector. The long-awaited industry restructuring was put into effect, which would enable us to accelerate the process of moving into the mobile industry and commencing full service offering.

In the first half of the year, imbalanced competitive landscape in the telecommunications market as well as two major natural disasters of snowstorm and earthquake had negatively affect the company. In the face of pressure and challenges, we adhered to deepening the transformation and proactively taking measures to stabilize the fundamentals.

The overall performance showed the following four highlights. First, the company operating revenue remained stable through transformation. Second, we adhered profitable operations to support the company’s sustainable development. Third, we commenced the acquisition of CDMA business as well as prepared in advance for full service operations. Fourth, we continued to optimize the CapEx structure to further enhance the company’s competitiveness.

In the first half of ‘08, operating revenue was RMB89.406 billion, an increase of 1.5% year-on-year from the comparable KPIs. We exclude the impact of the natural disasters of snowstorm and earthquake and the new income tax law. The snowstorm and earthquake brought the negative impact and the positive impact is come from the new income tax law and we exclude this impact, The company’s EBITDA was RMB45.968 billion, a growth of 1.9% and EBITDA margin remained at a relatively high level of 51.4%.

Net profit was RMB12.181 billion, an increase of 0.8% year-on-year. Net add of broadband subscribers was 4.3 million and access lines in services dropped by 5.44 million. This table showed IFRS-based financial results, which include upfront connection fees.

In the first half of this year, the snowstorm in the southern region and earthquake leads to loss to the company. It is unfortunate that in the year we got two natural disasters and caused losses to the company of which assets write-off and maintenance costs due to snowstorm were about RMB370 million and 200 million respectively.

Assets write-off and maintenance cost caused by earthquake were about RMB1 billion and RMB130 million respectively. As a result, the company’s EBITDA for the first half of the year reduced by RMB1.7 billion, net profit reduced by RMB1.281 billion and CapEx spend increased by about RMB2.2 billion.

In the first half of the year, non-voice business was the main growth driver for the company’s revenue, contributing RMB8.047 billion which offsets the decline in the voice business revenue and show steady growth of total revenue of RMB1.315 billion. The transformation businesses, Internet and data business as well as VAS and integrated information services, they showed rapid growth and contribute revenues of RMB5.256 billion and RMB2.88 billion respectively, driving the revenue growth by 6.0 and 3.3 percentage points. They are now the major growth drivers of the company.

After several years of acceleration and implementation, the results of strategic transformation continued to expand and consolidate. In the first half of the year, revenue from non-voice business was RMB38.896 billion, a growth of 26.1% year-on-year, accounting for 43.5% of the total revenue, an increase of 8.5 percentage points over the year in which Internet and data business brought RMB24.534 billion revenue, an increase of 27.3% from last year, accounting for 27.4% of total revenue.

Revenue from VAS and integrated information services reached RMB11.987 billion, an increase of 31.6%, accounting for 13.4% of total revenue. Revenue from voice business in the first half of the year was RMB50.51 billion, a decline of 11.8% from last year. High growth in non-voice business over the years has rationalized the company’s revenue structure. The change in growth drivers further enhanced the company’s ability to offset the operating risks and achieve sustainable development.

In the first half of the year, the implementation of customer-focused informatization strategy achieved remarkable results. The most prominent were, first, revenue from government and enterprise customers increased by 13.5% compared to last year, contributing 37.1% to the total customer segment revenue; second, revenue from household customers increased by 2.9%, contributing 47.3% to the total customer segment revenue.

In the future full service operation, the company will adhere to customer-focused informatization strategy, continue to expand the three customer brands, BizNavigator, One Home, and Surfing [ph]. Surfing is the new brand for our mobile service to further refine segment customer demand through value enhancement and product bundling to enrich brand content and enhance customers’ perception and improve customers’ revenue contribution.

CapEx was RMB18.783 billion in the first half of this year, a decline of 9.5% compared to last year. Due to the necessary network recovery and restructuring after the snowstorm and earthquake and the CapEx plan for Beijing Telecom, the CapEx plan for 2008 is RMB47.093 billion. The incremental mobile business CapEx will be finalized after obtaining relevant approval on the acquisition of CDMA business.

In view of the declining traditional business and substantially developing transformation business, the company will insist on the principle of stringent CapEx control with rationalized structure to improve profitability, to provide sufficient network capability for full service operation and to ensure investment return.

Last month, we announced the detailed agreement with China Unicom on the acquisition of CDMA business signifying the entrance into the acceptation stage of our acquisition of a CDMA network and business. The company’s full service operation will be realized upon obtaining relevant approval.

Therefore, the near-term focus of the company’s management is to deal with the following three tasks. First, in the area of fixed-line business, solidify the three major customer bases and continue to accelerate transformation business, including broadband, VAS, and integrated information services. Second, to cooperate closely with China Unicom and actively work on the due diligence and asset verification of CDMA network and businesses, to prepare for the transfer of the assets. Third, conscientiously prepare for the mobile business operation. We get ourselves ready for the full service operation by completing the above tasks.

In conclusion, the favorable operating results achieved in the first half of the year were attributable to our continued effort in pushing forward strategic transformation and customer brand operation, developing the broadband, VAS, and integrated information service business and stabilizing the voice business to achieve stable and profitable development. We firmly believe that the upcoming full service operation will create a path for performance and prospects for the company and will continue to create new value for the shareholders.

Next, and we now invite Mr. Shang Bing to give you a briefing on the business development of first half of ‘08.

Shang Bing - President and Chief Operating Officer

Thank you, Chairman. Good afternoon, ladies and gentlemen. I will now introduce to you the company’s business performance of the first half of ‘08. I will introduce the business development by product category.

In the first half of 2008, access lines in service decreased by 5.44 million to 214.9 million. PAS subscribers were 51.99 million with a net decrease of 6.06 million. Local voice usage was 189.712 billion pulses, a decline of 6.3% year-on-year. Local voice revenue was RMB31.296 billion, accounting for 35% of operating revenue, showing a decline when compared to 41.3% last year.

To overcome the challenges of the declining voice basis, we promote integration of voice and non-voice businesses and increase the sales efforts in the two major customer segments, government and enterprise and household customers. On the other hand, we strictly controlled the marketing expense to low-end customers and insist profitable development of voice business.

In the first half of ‘08, domestic long distance usage was 49.864 billion minutes, an increase of 3.5% from last year. International long distance usage was 784 million minutes, a decrease of 0.9% from previous year. Revenue from domestic

long distance and international long distance were RMB11.331 billion and RMB1.352 billion respectively.

Total revenue from long distance business was RMB12.683 billion, 9.12% decline year-on-year. The company continued to optimize tariff packages and sales models, improved product design, strengthened the bundled sales of long distance local voice and broadband business to ensure service attractiveness and to mitigate the operating pressure of long distance business.

In the first half of ‘08, broadband subscribers increased 4.3 million to 39.95 million, an increase of 12.1% from the end of last year. Broadband access revenue reached RMB19.279 billion, 31.3% increase year-on-year. ARPU rose from RMB79 in the same period last year to RMB85. To promote the development of broadband business, we offer wireless broadband access and roaming for our broadband customers with Wi-Fi connections. We also provide one-stop Internet content and application to consolidate our leading position in broadband markets.

In the first half of ‘08, VAS and integrated information services revenue was RMB11.987 billion, an increase of 31.6%, which account for an increase proportional of total operating revenue to 13.4%. All types of business are making steady growth at a rapid pace. With this regard… with regards to this type of business, we will leverage professional and centralized operation, strengthen the cooperation along the value chain, accelerate the development of new business service and enhance information service offering capability of full service, promote scale and diversified development of VAS and integrated information service.

Best Tone, IT services and applications together with video applications are fast growing businesses. Revenue increased by 56.7% and 101.8% respectively, accounting for an increase of 0.9 and 1.2 percentage points in the total revenue. For Best Tone on one hand, we enrich information content and enhance brand awareness. On the other hand, we advance cooperation to enhance commerce and travel service capability.

Our principle on developing IT service and application and video application business is targeting mid-to-high end government and enterprise customers, offering integrated comprehensive solution to meet the needs of high-end customers, at the same time leveraging the existing customers and network resources to ensure operating efficiency.

As Chairman Wang has mentioned, the company will continue to adhere to effective strategic transformation by adopting customer-focused, differentiated operation strategy in the next phase of full service operation. We will leverage the two customer brands to promote mobile service penetration through adding mobile services into the two customer brands, BizNavigator and One Home, we are able to offer specialized implementization products and integrated information solution enhance to enrich customers’ experience.

At the same time, we will strive to create and establish China Telecom’s mobile brand. By developing mobile communication in the Internet era, we will provide seamless information experience for our customers.

Now, may I invite our CFO, Madam Wu Andi to give you the details on the company’s financials. Thank you.

Wu Andi - Executive Director, Executive Vice President and Chief Financial Officer

Thank you, Mr. Shang. Good afternoon, ladies and gentlemen. I will now present to you our company’s financial performance in the first half of ‘08. In the first half of ‘08, the company’s revenue was RMB89.406 billion, maintaining a steady growth of 1.5%. However, affect by snowstorms and earthquake, there was a significant increase in network operations and support expense that lowered the EBITDA to RMB44.268 billion, a drop of 1.9%.

Net profit was RMB11.6 billion, a decline of 4%. In this regard, we have strengthened our budget management and cost controls to elevate the impact of the natural disasters to the company.

In the first half of ‘08, operating expense was RMB71.682 billion, accounting for 80.2% of the operating revenue, experienced a significant increase compared with the same period last year, which was attributable to the unexpected disasters. We record an increase of 2 percentage points in network operations and support expense as a percentage of total revenue. Other operating expense as a percentage of total revenue, however, will stay still at a reasonable level. Excluding the impact of disasters, operating expense as a percentage of the total revenue were only 78.3%, drop by 0.1 percentage points.

In the first half of this year, we continued our stringent cost control to support business development. First, by advancing precision asset management enhancing resources utilization, depreciation and amortization expense was RMB26.544 billion, maintained a stable proportion. Second, to promote sustainable business development and improve network quality, network maintenance expense were increased. Excluding the impact of natural disasters, network operation and support expense reached RMB14.97 billion, maintained a stable proportion of revenue.

Third, to ensure effective incentive for employees, personnel expense maintained a stable proportion of the revenue amounting to RMB13.857 billion in first half. Fourth, to improve cost effectiveness, we implement stringent control on PAS handset subsidies and tilt investment towards profitable business and customer segments. SG&A was RMB11.103 billion, 0.3 percentage points lower of the total revenue than last year.

In summary, the company strictly control cost to prepare in advance for future full service operation and ensure its healthy and sustainable development. In the first half of this year, we further optimized our CapEx structure with one up and five downs. First, we continue to optimize our network quality and increased investment in Internet and data. Its CapEx increased by 27.3%, an increase of 15.9 percentage points.

Second, we concentrate on full service operation and lower our CapEx in IT and support by 7.6%, maintained stable proportion to total CapEx. Third, investment in fixed lines reduced… decreased by 38.7%, accounting a drop of 3 percentage points of total CapEx. Fourth, investment in local transmission and access decreased by 43.7%, a decrease of 8.4 percentage points. Fifth, maintenance CapEx on PAS to ensure normal operation declined by 88.4% from last year, accounting for a decrease of 3.4 percentage points of total investment to 0.5%. Sixth, through strength in CapEx control, other investment decreased by 14.4%, a decline of 1.1 percentage points of total CapEx compared to same period last year.

Our total debt to total cap ratio further decreased to only 29.5%, 3.9 percentage point less than same period last year. Our free cash flow was RMB21.669 billion, an increase of RMB2.204 billion from the same period in ‘07. The growth rate was 11.3%. The company has a solid financial fundamentals and ankle room [ph] for debt financing, which could sustain further future development of full service operation.

In the next phase of transformation, we will continue to advance our value management and enhance our financial management standard. We will delegate our efforts to the following. First, precision resource allocation by tilting resources towards high-value consumers and key business to support transformation.

Second, strengthening centralized financial management, leverage corporate structure reform to improve treasury management and asset utilization. Third, further optimize CapEx and cost structure to effectively control financial risks. Fourth, rational resources allocation to fixed and mobile services, leveraging existing resources and capability to drive synergy and promote profitable scale development of mobile business.

The above measures bring us sufficient resources of free cash flow to prepare in advance for the launch of full service operation thereby creating long-term value for our shareholders.

This is the end of my presentation. Thank you.

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