China Unicom's (CHU) CEO Xiaobing Chang on Q2 2014 Results - Earnings Call Transcript

| About: China Unicom (CHU)

China Unicom Limited (NYSE:CHU)

Q2 2014 Earnings Conference Call

August 7, 2014 6:00 AM ET


Xiaoke Zhou – IR

Xiaobing Chang – Chairman and Chief Executive Officer

Yimin Lu – Executive Director and President

Li FuShen – Executive Director and Chief Financial Officer

Xiaoke Zhou

Ladies and gentlemen, those friends attending our meeting through video conference in Beijing, Shanghai and Shenzhen. I’m glad to welcome you to 2014 Interim Results announcement of China Unicom Hong Kong Limited. My name is Xiaoke Zhou. And today, we are going to have the video conferencing in four cities namely; Hong Kong, Shanghai, Beijing and Shenzhen. And we are happy to have this opportunity to communicate with our investors. And we will have 70 to 75 minutes for our results announcement.

Firstly, we will have about 25 to 30 minutes of presentation for the Hong Kong meeting, and then another 25 to 30 minutes for the Mainland meeting for question and answers. Let me introduce our management present here: Mr. Chang Xiaobing, Chairman and CEO of the company; Mr. Yimin Lu, Executive Director and President of the company; and Mr. Li FuShen, Executive Director and CFO of the company.

Firstly, Chairman Chang would like to introduce the overall results in the first half and also some of our prospects. Then President Lu, will share with you the operating and financial performance.

First of all, the floor is given to Chairman Chang.

Xiaobing Chang

Good afternoon, everyone. Let me walk you through the company’s key results. In the first half of the year, operating revenues totaled RMB 149.6 billion, up 3.6% year-on-year. Net profit was RMB 6.69 billion, up 25.8% year-on-year. Basic EPS was RMB 0.281.

In the first half, the company’s service revenue growth slowed down due to the slowdown in the industry revenue growth, the implementation of VAT reform, the adjustment to interconnection settlement policy and the transformation of marketing model. And service revenue increased by 9% year-on-year, and still led the industry by exceeding the industry average by 3.4 percentage points.

The market share in service revenue further increase and reached 21.9%, up 0.6 percentage points year-on-year. Also in the first half, the company’s profitability improved steadily and its financial status turned more solid. EBITDA increased by 13.1% year-on-year, reaching RMB 47.7 billion. Due to the operating expense arising from PHS asset disconnection, the fluctuation of exchange rate, the corporate pension contribution and other factors, net profit increased by 25.8% year-on-year reaching RMB 6.69 billion.

Since the beginning of the year, the company further optimized its business structure and enhanced its sustainable development. In the first half, the Mobile’s share of the company’s service revenue reached 64.1%. Non-voice share of service revenue reached 59.5%. Mobile broadband’s share of mobile service revenue reached 66.9%. Fixed-line broadband’s share of fixed-line service revenue reached 55.1%.

The company continued to promote the broad and in-depth coverage of 3G network, rapidly deployed the 4G network, enhanced the end-to-end network optimization and built the high-quality mobile broadband network with leading user experience, with network quality being improved over the time.

In the first half, the company expanded 4G/3G base stations by 84,000 reaching a total of 491,000. The maximum dial-in speed, which is 150 megabit per second for its LTE Network, 42 megabit per second for its DC HSPA+ Network and 21 megabit per second for the Whole HSPA+ Network.

We accelerated construction of fiber-optic Network. The broadband access ports increased by 8.7% year-on-year, of which 73.8% Fiber-to-the-Home and Fiber-to-the-Building.

In the first half, taking the opportunity of VAT reform, we deepened the management reform in key areas, as to follow the new trends in mobile internet area and improved cost effectiveness and development qualities, and we have deepened our reform. For example, we continued the transformation of sales and marketing model, focusing on profitable development and existing customers. We optimized its product portfolio device offering and distribution channels, and further improved the quality of its subscribers and the business, following the way of internet thinking, the company explored the integrated online and offline sales and marketing practice, with the WOEGO B2B platform being built for the small and medium-sized distributors.

The company consolidated their resources along the industry value chain and provided effective transparent and fair operational support. And we also leveraged the centralized business support system to create the responsive and centralized business decision process, and made first step for the direct operational management between headquarters and local business units.

We proactive established a fair, transparent and dynamic resource allocation mechanisms targeted to local business unit, strengthened investment project roaming arrangement, built a comprehensive evaluation system for municipal subsidiaries, implemented market-oriented management for sales outlet and optimized evaluation and incentive measures, so as to stimulate the organic growth of the company.

The ICT is developing very rapidly, and it has been integrated with all the corners of our society. And the information industry and information economy are the important strategic opportunities with strong market demand.

China Unicom will continue to consolidate and create differentiated service advantages, proactively adapt to market changes and firmly grasp opportunities to ensure the company’s continuous and rapid development. Centering on market and customer demands, the company will put greater efforts in innovation, transform its development model and accelerate the development of its key businesses, such as mobile broadband and fixed-line broadband, so as to maintain its industry leadership in growth rate and achieve continuous improvement in market share profitability and overall strength.

The company will focus on strategic development direction and carry out corporate reform. The company will accelerate the reform in its mobile internet-oriented operational system and other key areas, such as; sales and marketing investment and construction, recruitment and remuneration as well as resource allocation and proactively explore the opportunities to transform and innovate in areas, such as; mixed ownership internet finance and mobile service resale, so as to enhance its vitality.

We are confident of our future and will strive to create more value for our shareholders through our continuous efforts.

Thank you. I’m now glad to invite Mr. Lu to share with you the operating performance of the company. Thank you.

Yimin Lu

Thank you, Chairman Chang. Let me now present you the company’s operating and financial performance in the first half of 2014. The company’s service revenue recorded RMB 127 billion, up 9% year-on-year. Mobile broadband business including both, 4G and 3G and fixed-line broadband business remained the key revenue drivers, of which, mobile broadband service revenue increased by RMB 13.5 billion, growing total service revenue by 11.6 percentage points, being the first force of revenue growth.

Fixed-line broadband service revenue, increased by RMB 2.3 billion, growing total service revenue by 2 percentage points. To be specific, regarding mobile business, we are facing complex competitive environment. We proactively implemented the strategy of leading mobile broadband and innovating operational integration, and thus achieved a double-digit growth in mobile subscribers as well as revenue.

Mobile net adds reached 14.02 million. Total mobile subscribers reached 295 million, up 12.5% year-on-year. Mobile service revenue increased by 11.7% year-on-year, of which, non-voice share of mobile service revenue reached 49.1%, up 4.9 percentage point. Data usage from mobile handset users increased by 80.1% year-on-year of which data volume from mobile broadband accounted for 81.3%.

In respect of mobile broadband business, we focused on faster network, broader coverage and better user experience strategy, proactively leverage that the advantages of network as well as device value chain and fully enhanced customer experience.

The company took a series of measures to further enhance customer perception, including simplifying product portfolio, optimizing customer service interface etcetera. The mobile subscribers increased by 40.8% year-on-year reaching 141 million. Service revenue increased by 32.9% year-on-year reaching RMB 54.4 billion.

Mobile broadband business has been contributing to mobile business. Mobile broadband penetration rate reached 47.7%, up 9.5% year-on-year. Mobile broadband’s share of mobile service revenue reached 66.9%, up 10.7 percentage point year-on-year.

The company continued to deepen and tap the value operation with an open and cooperative attitude. The company further developed world class open platform, enhanced internet orientation, proactively promoted unified cooperation with internet companies, diversified sales and marketing by exploring social network potentials and optimized the data products, so as to fully enhance user perception data services.

In the first half of the year, data revenue from mobile broadband handset subscribers increased by 50% year-on-year to RMB 20.2 billion, representing 37.1% of mobile broadband service revenues. Monthly data usage per mobile broadband handset subscriber reached 216.8 million, up 29.2% year-on-year.

On May 17, 2013, MIIT issued Notice on Mobile Service Resale Trial allowing qualified companies to apply for mobile service resale trial. The company upheld a concept of open, proactive and win-win cooperation, proactively pushed forward the trial of mobile service resale, signed resale agreements with 25 enterprises and provided flexible corporative model as well as standardized the business support across the network to mobile service resellers.

The company provided mobile service resale for 12 enterprises, since May 28. At the end of July, mobile service retail subscribers reached 180,000.

Next, fixed-line business. In the first half of the year, the company further accelerated the upgrading and speeding up of its broadband network, optimized the fixed-line selling and marketing system, as well as customer retention system and improved the quality and service of broadband business, such to ensure that the fixed-line business growth.

Fixed-line service revenue reached RMB 45.2 billion, up 4.5% year-on-year, of which fixed-line broadband service revenue increased by 10.2% year-on-year accounting for 55.1% of fixed-line service revenue.

Fixed-line broadband subscriber increased by 7.7% year-on-year. Penetration rate of WO Family subscriber in total broadband registration subscriber reached 35.3%.

In the second half of the year, coping with household customer need as a starting point, the company would leverage its full service advantages, push forward the bundled mobile and fixed-line broadband services by promoting the integrated telecom service package, Smart WO Home, so as to continue to enhance customer value.

In the first half of the year, the company continued to deepen its position in the areas such as; Internet of Things, IDC and Cloud Computing. The company accelerated business development of key industry applications and achieved new breakthroughs in areas such as; IT application education, auto industry and smart cities.

The company’s key industry application users reached 49.38 million, around 200 Smart City projects were signed. The company was awarded the Top Service Provider for Chinese SMEs for two years in a row.

In the first half of the year, leveraging on the replacement of business tax with value-added tax, the company further promoted the transformation of its sales and marketing model, so as to improve development quality and cost effectiveness. At the same time, the company proactively optimized its terminal offering policy as well as commission model, adjusted distribution structure and firmly promoted e-channel development, so as to improve resource use efficiently.

The company proactively promoted innovation of operating distribution channel, launched the WOEGO, B2B platform for small and medium-sized distributors, consolidated the resources along the industry value chain, established a transparent and fair resources supplying mechanism, promoted operational transformation in key areas so as to establish a cost effective development model, hence the company enhanced its differentiated competitiveness.

In the first half of the year, the increase in sales and marketing expenses slowed down. The growth rate of sales and marketing expense including handset subsidy was 13.1 percentage points lower than that of full year of 2013. Handset subsidy as share of mobile broadband service revenue decreased to 6.1% in the first half of 2014 from 8.7% in 2013.

Now let’s take a look at costs and expenses. In the first half of the year, total costs and expenses was RMB 140.7 billion, up 2.6% year-on-year, which was 1 percentage point lower than operating revenue growth rate in the same period, excluding costs of telecom products sold and the impact of handset subsidy. The adjusted operating expense was RMB 116.4 billion, up 7.3% year-on-year, which was 1.7 percentage points lower than service revenue growth rate.

Adjusted operating expense as share of service revenue was 91.7% down 1.3 percentage points year-on-year. More detailed analysis is as follows. Interconnection charges amounted to RMB 7.6 billion. Benefiting from the adjustments to interconnection settlement, interconnection charges as share of service revenue decreased by 2.5 percentage points year-on-year to 6%.

Depreciation and amortization expense was RMB 36.9 billion. As share of service revenue was 29%, down 0.1 percentage point. Network operation support expenses was RMB 18 billion, due to the increase in network access and the rising energy price network operation support expense as share of service revenue increased by 0.5 percentage point year-on-year to 14.2%.

The company carried out corporate pension plan to increase incentive for junior staff. Employee benefit expense was RMB 17 billion, as share of service revenue was 13.4%, up 0.6 percentage point year-on-year.

Selling and marketing expense including handset subsidy was RMB 27.2 billion, as share of service revenue was 21.4%, up 0.3 percentage point year-on-year.

In the first half of the year, the company’s cash flow continued to increase. Operating cash flow amounted to RMB 41.7 billion, up 1.1% year-on-year. CapEx was RMB 21.6 billion, down 0.1% year-on-year. Free cash flow amounted to RMB 20.1 billion, up 2.5% year-on-year.

With the continuous improvement on cash flow, the company’s assets and liability structure became more rational and its financial status turned more solid. Total interest-bearing debt decreased by 5.3% as compared to the end of last year. Liability-to-asset ratio was 57%, down 1.6 percentage points as compared to the end of last year.

Net debt to capital ratio was 32.7%, down 1.2 percentage points from the end of last year. In the second half of the year, the company would proactively adapt to market changes and accelerate the implementation of the leading mobile broadband innovation integration strategy. At the same time centering on the leading user experience, the company will fully enhanced network operation capability and service support capability.

In addition, the company will promote management reform with the goal of enhancing corporate aim for new development breakthrough success to create more benefit to shareholders. Thank you.

Xiaoke Zhou

Thank you, Chairman Chang and President Lu. Now we’re ready to receive questions from the Hong Kong meeting room.

Question-and-Answer Session

Unidentified Analyst

Thank you very much for the presentation. I’d like to ask few questions. The first one is on the impact of VAT. Can you give us an indication of what the actual amount of the impacts and also whether that it will [indiscernible] across the quarter, something that we can have for forecast. The second question is, understanding the relationship between VAT implementation and the confirmation of the strong market growth. How is the VAT having impact on [Inaudible – Microphone Inaccessible].

Unidentified Company Representative

[Foreign Language – Chinese] Regarding the impact of VAT, we have been communicating with the investors over time, since June 1, this policy becomes effective. The month of June has been impacted, but you cannot judge the whole year’s situation by just look at the figure in one single month. And generally speaking, regarding the impact on the revenue, because we have 11 months versus just one month. We have to look at the service structure, for example, the voice versus non-voice. And also I think that the business structure really determines the tax. And if the non-voice service takes about 60% of the total business and 40% of the voice business, this is what we really expect to see.

And in the future, we do expect to see more and more value-added services being provided. And I think that the ultimate tax rate will be lower than 8%, but it really depends on the further development of our business structure.

And regarding the impact on cost, especially the sales and marketing costs, we are conducting a lot of reform to improve our cost structure. And in this way, we can improve our capability of getting tax receipts. And in that way, I think that the integrated tax rate will be kept at a reasonable level. And what I mean by just looking at the figures in one single month, you cannot make the judgment of the overall system, because currently we are still adjusting some of our models, and I think that with one quarter being finished, we can draw into some preliminary conclusion.

Generally speaking, there will be some short-term impact on our performance, but with the efforts made by the management and the whole company, we are going to eliminate the innovative impact on our performance. And I think that we’re going to give you some satisfactory results at the end of the year.

Unidentified Company Representative

Regarding the second question, let me take it. Well, I think that you know the business development mode in China. We use to take the cost-driven model, and that was a very extensive model of development, and we were under very large tax burden. And that kind of model went for long time, and most of the telecom operators tended to take this kind of cost-driven model, but with the VAT reform, this kind of extensive operation model needs to be transformed.

And in order to cope with this VAT reform, China Unicom is trying to conduct intensive management of our cost. And we are trying to transform our business model. That means the cost-driven model will be changed to the intensive model with more service subsidies. And in this way, we hope that we can drive up our performance.

One typical example is that we use to depend on commission to drive up the market operation, but now we are trying to provide some service subsidies. This might cost some negative impact on our revenue, but at the same time, it will cut down our tax burden and the safety cost. And also in terms of the device subsidy, it also will be adjusted. And the key point is that in terms of the future business development, we are focused more on the quality of our development, and we hope that we can develop more customers and acquire more subscribers, by providing them with the quality service. And that means we hope that we can improve the resource utilization ratio, leveraging this VAT reform. Thank you.

Unidentified Analyst

I have two questions. The first question is about the tower company. After the establishment of this tower company, what are the impact on your CapEx, and how are you going to share the CapEx with the tower company and what were the existing assets of the tower company, and will you actually inject your existing asset to the tower company. And if that is the case, what about the timetable? And another question is you have got the FDD 4G license. What about the base stations to be built, and also what about your 4G customer development and the base station development plan?

Unidentified Company Representative

Well, the tower company was jointly established by the three major telecom operators. And I think that this newly established joint-venture will push forward its business development in the future. I think that you are asking about the question, and this question is actually faced by the management of this tower company as well as the three telecom operators, and we are trying to enable these most transition of this tower company.

And regarding the evaluation and cleaning up of the existing assets, in what way are we going to evaluate, in what way are we going to inject all those assets into the tower company? This is something that we have to discuss with one another. And before the operation of the tower facilities by the tower company, we ask the telecom operators will still operate those existing assets, but in the future, the transfer of the assets will be done following the market rules.

And please be rest assured that since the three operators have invested to establish this tower company, we do share with one another the intention to help this tower company to make a better business, and we hope that this kind of reform can bring a lot of benefits to all of us.

And you asked about the base stations, the 3G base stations and 4G base stations. For China Union, we are trying to take the lead in mobile broadband, and we are trying to integrate the 3G with the 4G network. So in terms of the network infrastructure construction, on one hand, we would like to strengthen the construction of 3G network to expand its coverage and to have the in-depth coverage of 3G network. And also in those highly competitive areas with huge data volume demands, we are going to accelerate the building of 4G network.

And in the first half of the year, we have 491,000 base stations, including 3G and 4G. And in another half, we will increase the base stations by 60,000. And in terms of the 3G network – in terms of the 4G network, we are going to newly build 100,000 base stations. So in the future with the integrated network of 3G and the 4G, we hope that we can provide a mobile broadband network enabling better user experience, and this is our target for the whole year and we are going to complete our work according to this plan. Thank you.

Xiaoke Zhou

Next question

Unidentified Analyst

I have two questions. The first question is for the management team that is the FDD license. When will it be of your – newly acquired subscribers with tariff subsidy, what about the churn rate compared to those acquired with the handset subsidy?

Unidentified Company Representative

You know that now the government already has a very clear attitude. For China Unicom already got the trial network – hybrid network trial in 16 cities. And on many occasions, I’ve talked about this. So once we got this license to have this hybrid network trial in 16 cities, it will have some major impact on the industry chain of the device. So we know that in our older device will support the four technology standards that’s; TD-LTE, FDD-LTE, WCDMA and GSM. So will this hybrid network trial in the 16 cities, there would be some positive impact. And also recently, we got the FDD-LTE license, and we are going to deploy our network in 300 cities within the city, within the country.

And this will lay a very solid foundation for us in 4G area. And obviously we very much hope that we can get the FDD-LTE license as soon as possible, because this is going to have a positive impact on our business development. And obviously, we have to wait for the government to make the final decision.

In terms of the impact on CapEx in 2015, as I mentioned that for China Unicom in the fixed-line [ph] we’re going to have network combining the 3G and 4G. So we’re going to have network with better coverage, faster access speed and a better user experience. So in terms of transmission, in terms of the trunk network, we made lots of investment in the past and in the 4G area, those investments will now be vested.

And also for the LTE construction in terms of its investment scale and progress, we are going to follow very closely in terms of the data traffic change in existing 3G network, and then we are going to come up with corresponding strategy. In this regard, we are different from our competition, that’s China Mobile and China Telecom.

So they have to start from scratch and build a brand new network, but for us, we are different. So we’re going to look at the hot spot area and look at customer demand and then we are going to speed up LTE construction in those areas correspondingly. So with this backdrop, I don’t think there will be any significant impact or change to our CapEx for next year. So we are going to take into consideration the specific circumstances to make the necessary adjustment.

Talking about the subsidy to handset as opposed to tariff, I think obviously in the past this subsidy to handset had its advantages as compared to other kind of subsidies, because by providing this kind of handset subsidy, we have improved a stickiness of our subscribers and that has increased our market share, but in the future due to some change than maybe we have new policies, for example we can provide kind of tariff subsidy to package subscribers.

And I think in terms of user experience perception, there won’t be any major change in this two kinds of subsidy approaches.

Xiaoke Zhou

Another question?

Unidentified Analyst

Just three questions for me. The write-down on the Personal Handy-Phone system. Was that a one-off write-down or will there be further ones in future? And could I also ask which line item in the accounts does that charge taken-in, and if you could also just let us know, was it in the second quarter alone or was it in first quarter and second quarter, the amount in each quarter? That would be very helpful. Thank you.

Li FuShen

[Foreign Language – Chinese] Well, with the issuing of the FDD license and also the PHS service termination; in Q1 it’s 30%, in Q2 its 70% and the total is RMB 1.15 billion, and the residual value of PHS is RMB 150 million.

Unidentified Analyst

Thank you, Mr. Li.

Unidentified Analyst

Two questions. The first question is about the band of U900. How about its development in the rural area? Another is your dividend policy. So do you have very steady policy in this regard for your dividend payout?

Unidentified Company Representative

I’ll answer your first question and then our CFO is going to answer the second question regarding dividend policy. For U900, when the service traffic is not very big, it’s a good choice. But if you look at today’s 3G network and also the upcoming 4G network, U900 could no longer be the best carrier frequency.

So for the remote areas obviously, it’s good for comprehensive utilization, but we need to understand that its capacity is very limited. So we need to position it very precisely as fit for those remote areas where you have very sparse population to help improve coverage and have better return on investment.

But if you want to apply it irrespective of the circumstances, then it will not make sense. So we’ve got to be very actively and cautiously promote the usage of U900 and be compliant with government regulations. At the same time, we need to realize that with the fast penetration of smartphone and mobile broadband, because we understand that even RMB 1,000 smartphone is now very good and provides very good user experience.

It means that we can help migrate more current users to be the mobile broadband users. So we know that China has a very large geographic coverage, and in certain area we have very sparse population and the traffic is very small there and every now and then you have a roaming user, then U900 might be a good choice. So we need to treat this issue very cautiously and in terms...

Li FuShen

For the dividend payout policy, our purpose is to maximize the benefits of our shareholder as we improve our performance, as we improve our capabilities to serve our shareholders, we are going to maintain a very steady dividend payout ratio. And in this way, we can provide the long-term and steady return to our shareholders and investors. Thank you.

Xiaoke Zhou

Can we have the next question?

Unidentified Analyst

Two questions regarding mobile business. The first is about the declining ARPU in the first half. Could you please comment on the reasons, and what about the churns of the mobile ARPU, and excluding the VAT impact, do you still witness the continuous declining of mobile ARPU? Second question, in terms of the mobile growth rate, what about the 3G plus 4G growth? Do you think that the growth or the net adds will be the same as you had in the last year or will it be reduced? And the other question is about the mixed ownership policies. Do you have any update that you can share with us?

Unidentified Company Representative

Regarding the decline in ARPU, I think that the biggest factor is the policy factor, the VAT reform and the reduction of sales and marketing cost. Those have changed our commission structure and the revenue structure. Some of the commissions have been changed to discount, and some of the taxes including in price were included in revenue, but now they are excluded.

In addition, we released some integrated service packages with 3G and 4G. And we tend to provide better preferential tariffs for those integrated service packages. But even if the tariff reduced, it takes time for the 4G business to grow and it takes time for us to see the increase of the data volume. So in a such a transitional period, our ARPU would be influenced.

And another reason is that as we have been expanding our customer base, there will be increasing number of low-end customers. For example, those customers who are subscribers of 2G and 3G integrated service packages. And those are the three main factors which caused the declining of our mobile ARPU. And certainly policy is the most important thing. And generally speaking, I think that the future decline in rate will not be as big as we are having now.

And in terms of the customer base development, I think that we are going to work – try our best to meet the target, but I admit that we are facing very big challenge right now, and so far we don’t have any new adjustment. And regarding the mixed ownership, the reform in China has been deepened and mixed ownership is one of the choices for China to deepen its reform.

And for all the state-owned enterprises, especially those large-sized enterprises and the central government, they are trying to carry out the reform of the mixed ownership. And for China Unicom, we are making our own choice in this area. For example, the tower company is a new way for us to drive up the industry development with the common efforts made by the three telecom operators.

And in terms of the system and the institutional reform, there are some headrooms for us to grow in terms of the ownership reform.

And for China Unicom in some new business area, we are exploring the new ways of developing those new businesses. And I know there are some market speculations with respect to China Unicom, but those are just speculations and those are not the real actions that we are taking. And I think that we need to do before we see anything, and I hope that next year when we made our results announcement, I can give you some real results in terms of the mixed ownership reform.

And in some new areas, we hope that we can make some breakthrough in terms of the mixed ownership reform. Thank you.

Xiaoke Zhou

Time for the last question.

Unidentified Analyst

Thank you. I actually have two questions concerning the investment. The first one is about the CapEx in the whole year. Well, in the first half, the CapEx did not increase that much, and what about your guidance for the whole year? And the second question is about depreciation. Last year, it increased by 8%, and what about the guidance of depreciation for the whole year?

Unidentified Company Representative

Well, the CapEx for the whole year will remain unchanged. There won’t be some significant change. Well, the RMB 80 billion include the CapEx for the network construction including 4G and 3G. And our CFO takes second question.

Li FuShen

Regarding the growth rate of depreciation, as we are accelerating the 3G network construction and with the increasing of the new assets and with the reduction of the existing assets, the depreciation ratio has been kept at higher level, but I think that with VAT reform, I think that the depreciation rate will be declined in the future. Thank you.

Xiaoke Zhou

Thank you very much for the questions from the Hong Kong meeting room. And I now would like to transfer to Shanghai meeting room. Any questions from there?

Unidentified Analyst

Thank you very much. I only have one question. We see that the net profits growth rate, it decreased significantly than our expectation. So can you give us some specific figures to indicate the impact from VAT reform on your net profit?

Unidentified Company Representative

According to the results that we announced just now, in the first half of the year, the net profit grew by 25.8%. And there are three factors that I’d like to draw your attention to. The first factor is the granting of FDD license and the cleaning up of the frequency for PHS. And in that way, we have about RMB 1.15 billion as a result.

And the second factor is the increase of financial cost. And the average financing cost is about 3.9%. This has something to do with the increasing financing costs and also the fluctuation of exchange rate. In the first half, you know the exchange rate between renminbi and the U.S. dollar. And compared with that in the past year, there has been a minus RMB 1.08 billion coming from the fluctuation of the foreign exchanges.

And the third factor is the corporate pension contribution. And there are about RMB 440 million, increase due to the corporate pension contribution changes. Thank you.

Xiaoke Zhou

Any questions?

Unidentified Analyst

Thank you. I have two questions. The first one is the increase of the broadband ARPU. So my question is, how should we look at the trend of your ARPU for broadband? And the second one is your 3G subscribers. Could you share with us? Second question is exchange rate loss. Loss resulting for exchange rate.

Unidentified Company Representative

In terms of the broadband ARPU increase, it’s the fiber-optic replacement. So by increasing the speed will increase the tariff and help us retain existing subscribers and also we’re working with a value-added service vendors and that’s why our revenue for broadband also increased.

For the future, for our fixed-line broadband ARPU, our forecast is that we are very optimistic there will be a steady development. And for this year, for the fixed line broadband, its revenue growth is going to contribute significantly to the company’s performance.

For our broadband subscribers, we have a certain guidance here. Maybe I can give you – yes, actually for the broadband subscribers is here. It’s for FTTH account for 21% of the total broadband subscribers. And our total broadband subscribers are 67.42 million and among which 21% FTTH subscribers.

For your second question, so maybe you can talk to our Shanghai unit or Asia company, because we have U.S. dollar-denominated debt, and so that’s why when we do the financial statements, we are influenced by exchange rate.

Xiaoke Zhou

Now we switch to Beijing.

Unidentified Analyst

Dear management team, [indiscernible] I have two questions. The first question is similar to a question asked in Hong Kong earlier. So with the fast deployment of 4G, so in terms – in the past, Unicom enjoyed certain advantages in terms of your network speed. So what do you see the competition scenario in the future? And secondly, I have this assumption, when you talk about mixed ownership reform of SOEs. If you are to make a choice, who do you want to work with, do you want to work with someone who is first content or someone very strong in internet service?

Unidentified Company Representative

I’ll answer the second question first. Obviously you like the second question. In terms of mixed ownership exploration, I think we are looking at two issues. Firstly, we want to establish a more flexible modern enterprise system and that’s about what I can say here. And obviously the various parties are place are thinking how to find some physical way forward.

And another issue is what I mentioned earlier, so in some new business area, so for mobile internet, it’s impacting all works of life and the consumers are benefiting from mobile internet. So in the past, OTT players were exercising major impact on the traditional telecom operators, but at the same time, they are also providing us with new opportunities, because OTT service goes hand-in-hand or is based on the basic service provided by telecom operators. So, looking to corporate with strong players or innovators or resource owners in various fields.

Regarding our 3G and 4G network development in the future. So for China Unicom we talk about integrated 3G and 4G broadband mobile network development. So now we have 2G plus 3G plus 4G all integrated into one single network, and so obviously our devices and equipment – well, first of all, address the issue of voice telephony service. For example for some remote area, hot spot area, we’re going to address the issue of coverage in terms of voice telephone service.

And also in terms of data service, it’s based on our data network and the lowest speed now is 21 MBPS. And if we upgrade it to DC, it’s going to be 42 MBPS. And if that rate still cannot meet consumer demand, then we’re going to deploy FDD and TD-LTE network.

So for consumers, if they have smart device, they really don’t care whether they are using the 3G or 4G network. What they do want to – do get end 21 plus 42 or even 150 MBPS. So I think that by this integrated network of 3G and 4G, we can provide a good user experience to our subscribers. And also for the radio access network, we have the IP-run carrier network. And for China Unicom, we are the second largest internet operator in China. So we have a very rich experience in this regard. And also we have very rich data resources.

So we’re working very closely with content department, so that we can provide this end-to-end mobile broadband service user experience to our subscribers. And I think for this year, our key is to increase the coverage of our 3G network in terms of width and the depth. So we are going to at the same time speed up our deployment of LTE network. So in the upcoming two or three years’ time, we’re still very confident in terms of the depth of our coverage and we can maintain this differentiated competition advantage.

Xiaoke Zhou

Any other questions?

Unidentified Analyst

Good evening management team. I have two questions for you. The first question is, we look at your interim results report, you have signed agreements with 12 resale companies. So by the end of the year, in terms of MVNO subscribers, how many subscribers are they going to acquire? And if it increases very rapidly, will it have some challenge on your business? Another issue is for the device. We understand that SASAC is asking the telecom operators to reduce your sales and marketing cost. So as compared to last year, the subsidy will be greatly reduced and the shipment will be reduced as well, in terms of smart handset. How about bespoke devices? Can you give us the number of bespoke devices and what will it be share of your total number of devices sold?

Unidentified Company Representative

Regarding the resale business, up to now, we are working together with 25 MVNOs, of which 12 of them have developed the mobile resale business. And all of them started at the latter half of the May.

We have the one point entry platform. We have the nationwide unified tariffs under China Unicom. And in this way, we are providing our subscribers with wholesale voice and traffic or data traffic. So in this sense, I think that China Unicom is leading ahead of the others in working together with the MVNOs. And within just one month, we have acquired 180,000 subscribers.

Actually the exact number is 200,000 subscribers. So the growth rate is really fast. And we think that we are facing more opportunities than challenges. Under the current competition landscape, we really hope that through the MVNO business innovation and brand innovation, we can further drive our business development in a positive way. And we don’t really expect to see the material later half, we will have more customized devices, but the volume of those customized devices will be correlated with our business structure and business development trend.

And regarding the models of customized devices, we tend to have full range of product portfolio, but the major requirement is that all those devices need to support the 4G network. And in the remote and rural areas, we would like to further leverage our WCDMA network, and of course we will have some low-end 3G WCDMA smart devices.

So in the future the 4G devices will be in the mainstream, but we are not going to ignore the 3G devices.

Xiaoke Zhou

Thank you. We now would like to switch to the Shenzhen meeting room.

Unidentified Analyst

Hello everyone, I have two questions. The first is with fixed-broadband. And I know that we do have some positive development of fixed broadband, but at the same time we noted that there are some policies coming from the SAFTA, and also there are some business operations from the SAFTA-related operators. And China Telecom also issued some public announcement. They are going to enlarge their procurement for ODN and for the fixed-line network. So what about your investment strategy in the future? And the second question is about the mixed ownership. In my personal opinion for the telecom industry in China, we were facing the problem of the combined operation with ownership. And generally speaking, in the whole world in about 50 countries, they have already adopted the mixed ownership in the industry development. And according to Chairman Chang, we are going to conduct this kind of reform in top-down manner and also we are going to do it in a step-by-step way. So are we going to be proactive in taking all those policies, or are we just passively accept this kind of reforms? So could Chairman Chang give me some comments?

Unidentified Company Representative

Well regarding the fixed broadband. I think that we have a very clear strategy, because fixed broadband is one of the two driving forces for our business, the other one being mobile broadband. In the past several years, fixed broadband really drove up our business development. So the strategy is clear. We would like to strengthen our effort in the fiber-optic cable network construction, and we are going to renovate our current network.

As I said, FTTH subscribers only took about 21% of the whole. So that means we have a lot to be done in terms of improving the network infrastructure and also improving the customer base. And while we are improving the fiber network, we are trying to work together with the OTT and other value-added service providers. And we have our Smart WO Family businesses, for example the Home Gateways and the Smart Home. And in these areas we are going to build platform to enable those businesses. And I think that there are a lot to be done and we have very large space to improve. And as I said, we have clearly defined strategy for it.

Of course in such a process, we are going to encounter some challenges, that in my opinion, I think that our major competitors are still the telecom operators, like China Telecom. So it’s not those that you mentioned like those operators from SAFTA. And I think that we just will like to focus on doing our business better, and in this way we can build up our competitiveness.

Unidentified Company Representative

Well, I would like to add on something regarding the mixed ownership, because you asked me whether we are going to be proactive or passive in taking this kind of reform. Let me be more specific. Firstly, I think that we need to be frank in admitting that for the mixed ownership reform, it can be down from top-to-bottom or bottom-up.

And for those changes which can be driven top-down compared with those changes driven by the bottom-up model, I think that it will be much more correct for us to do it. I think that we are now exploring the way at both directions, but in terms of the top-down, it seems that there are some issues which cannot be resolved by the businesses themselves, and of course I’m like to welcome all kinds of wise advice.

If you have any good advices, I would like to invite you to come to Beijing and to have some discussions with me, because we are trying to do it top-down and we are seeking for a lot of advices. And I think that for the businesses like us, we are keeping a close watch on it. And are we proactive or are we passive? I think that for those areas where we can be proactive, we certainly would be proactive, otherwise we can’t.

And you have to be very practical. And of course we are not going to wait till everything happens and we are going to try our best to be practical.

And I understand that you really wish the management to be proactive and to drive the mixed ownership reform in top-down manner.

Xiaoke Zhou

Switch back to Shanghai. Any questions?

Unidentified Analyst

I have a quick question. So it’s now the big data age. So for the future in terms of big data, what’s your CapEx expectation and plan? And in terms of big data, do you have any concrete ideas as how to proceed with it?

Yimin Lu

Thank you. For big data, I think it’s really heated topic, and it has lots of opportunities and challenges. So for traditional telecom operator, we are endowed with data, but how to use those data properly I think it’s a challenge, because we have some regulatory constraints and also we have expectation from the users. So in terms of big data application, we are different from internet companies or operators.

In terms of confidentiality and privacy of the data of subscribers, we have very stringent compliance requirement. So yes, we do have those data in our hand, but in terms of the use of those data, the company has to maintain a very cautious and prudent attitude, but this doesn’t mean that we don’t have a grand plan in mind.

You know that for China Unicom, we are leading our competition in terms of centralized development. So for 4G in terms of monitory system and also our server service to the internet companies, we’re leading. And this will be called in the 4G age. So in the past, for our competition, they don’t have this centralized approach. And for us in terms of our ERP and various other fields, we are stepping up our effort.

While focusing our capacity building, we’re also thinking how we can use this data properly, and this is a challenge we are thinking about and we are making some exploration.

In terms of our external business cooperation, we have very little in terms of big data, but we can do something in terms of the improvement of the perception of the user and also improvement of service to our user. And all this does not involve lots of investment. And once we do this work properly, it will help boost our core competitiveness in the future. So we are adopting a very prudent and positive attitude in this regard.

Xiaoke Zhou

Thank you, Mr. Lu. The last question is for Beijing. We will switch to Beijing. Actually there is one question from Beijing.

Unidentified Analyst

Good evening. I’m [indiscernible]. I have two questions. Firstly, for the first half of the year, you talk about WO Family subscribers increased, as well as its contribution to your business performance. What will be its impact on your business in the future and what’s your thinking in this regard? The second one is this VAT reform in terms of interconnection settlement. Actually this interconnection settlement contributed very positively to your performance in the first half of the year. So in terms of interconnection settlement, can you give us more information for the first half of the year, and also your forecast for the future?

Unidentified Company Representative

So for the WO Family, China Unicom is leveraging our advantage in terms of the convergence of our fixed and mobile services. We are the number two mobile telecom operator, as well as the number two fixed-line telecom operator in the mainland China. So we have this advantage in terms of the convergence of mobile and fixed-line businesses.

And we launched the WO Family business model in China and its contribution to our mobile businesses, especially our mobile broadband business is quite significant. So in the past, we provide a terminal handset subsidy and also which have us acquire lots of mobile subscribers. And also we had this bundled package of mobile and fixed-line service.

So in the future, we are trying to make more exploration in this part of service, this WO Family plus is going to provide a unified account service and billing service, and also sharing of resources to our subscribers in the future. So I think this converged development is going to be a major driver for our business development. But at present the penetration rate of this world-class service is rather limited, but for us what really matters is the quality here.

So at present, the penetration is low in [indiscernible] there will be greater on [indiscernible] elements in the future. And also with the improvement of our support capability, we will be able to develop.

In terms of interconnection settlement for the first half of this year, due to the policy adjustment, in terms of – contributes positively to our interconnection expense and we also have some impact to our interconnection revenue. The total impact is RMB 400 million. So the net income is RMB 840 million for the first half of the year in terms of interconnection settlement.

So for this year, as a whole, this policy adjustment will change us from net expense to net income in terms of interconnection settlement.

So if you talk about the interconnection settlement of IP network, I can say that, it’s also decreasing.

Xiaoke Zhou

Thank you. And in the interest of time, we’ll conclude today’s announcement. We thank our management team here in Hong Kong and we thank our analysts attending the conference here in Hong Kong and also in the mainland of China. Feel free to contact our IR team if you have any further question. Thank you.

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