China Unicom Limited 2008 Interim Results Call Transcript

| About: China Unicom (CHU)

China Unicom Limited (NYSE:CHU)

FY08 Interim Results Call

August 25, 2008, 04:00 AM ET


Tong Jilu - Executive Director and CFO

Chang Xiaobing - Chairman and CEO


Jeffrey Tan - Credit Suisse

Helen Zhu - Goldman Sachs (Asia) L.L.C.

Tong Jilu - Executive Director and Chief Financial Officer

Good afternoon, ladies and gentlemen. I would like to welcome you to China Unicom's 2008 Interim Results Announcements. Our Chairman and CEO, Mr. Chang Xiaobing, join today's meeting and we update you about the proposed two transactions, the disposal of CDMA business and merger with China Netcom.

Firstly, I will share with you the main achievements and financial results of the company in the first half of 2008. In the first half of 2008, for the continuing operations that included GSM business and fixed-line business, total revenue reached RMB35.14 billion, up 4% from the same period of last year; EBITDA, RMB15.88 billion, slightly down 0.6%; pre-tax profit, RMB5.13 billion, up 1.2%; net profit, RMB3.77 billion, up 8.9%.

According to Hong Kong financial reporting rules, the CDMA business that was proposed to be disposed is reported as discontinued operations. The net profit for discontinued operations is RMB655 million. The company total net profit was RMB4.42 billion and basic earnings per share was RMB0.324.

For first half of 2008, revenue from continuing operations reached RMB35.14 billion, up 4% from last year, in which GSM revenue accounted for 92.6% of the total revenue and fixed-line revenue account for 7.4%. Value-added service businesses, they were the main source of growth with revenue of RMB8.08 billion, up 22.9%.

For the first half of 2008, the total cost and expenses for the continuing operations reached RMB30 billion, year-on-year up 4.5%, 0.5 percentage points higher than the growth rates of total revenue. The G&A and other expenses was up 7.9%, mainly driven by the rising energy prices and rental cost. The selling and marketing expenses were up 3.4% but remained flat as a percentage of the revenue comparing to last year.

In first half of 2008, the EBITDA margin for continuing operations was 45.2%, down 2.1 percentage points from first half of 2007 but up 0.5 percentage points from second half of 2007. Pre-tax profit reached RMB5.13 billion, year-on-year up 1.2%; net profit reached RMB3.77 billion, year-on-year up 8.9%.

In first half of 2008, we have taken measures in multiple areas to actively develop the market and have realized quality growth of GSM business.

As of June the 30th of 2008, total GSM subscribers reached 127.6 million, year-on-year up 12.1%. Total minutes of use reached 185.9 billion minutes, up 13.1%. In first half of 2008, revenue from GSM business reached RMB32.52 billion, year-on-year up 3.9% in which GSM service revenue reached RMB32.5 billion. MOU per subscriber per month reached 249.6 minutes, staying flat comparing to last year. Average revenue per minute was RMB0.175, year-on-year down 7.8%, mainly driven by the new roaming tariff adjustments since April 2008.

In the first half of 2008, total costs and expenses from GSM business reached RMB27.36 billion, year-on-year up 3%, 0.9 percentage points lower than revenue growth rates. EBITDA margin was 43.6%, down two percentage points comparing to last year.

In the first half of 2008, the value-added service business continued to grow rapidly. The GSM SMS volume has increased 6.9% comparing to the same period of last year. The number of Ringback Tone subscribers has increased by 20.8% while we continued to develop the maximum [ph] value-added services such as SMS and Ringback Tone were promoted to GPRS or related applications as priority. Currently, GPRS services are available nationwide in 31 provinces and we have established roaming agreements with 20 operators in 12 countries. As a result, GPRS penetrations reached 17.3%.

In the first half of 2008, revenue from GSM value-added services reached RMB7.85 billion, year-on-year up 21.6%. The VAS revenue as a percentage of the total GSM service revenue has increased from 20.6% in the first half of 2007 to 24.1%, of which SMS revenue grew 12.7%, Ringback Tone revenue grew 40%, GPRS revenue reached RMB448 million.

The fixed-line business has focused on expanding data, Internet application, and enterprise information services. The international incoming long-distance call minutes have increased 20.1%. Leased lines and circuit bandwidth increased 21.9% comparing to the same period of last year. Service revenue for external sources reached RMB2.62 billion, year-on-year up 5.6%. Pre-tax profit reached RMB350 million. EBITDA margin increased 2.7 percentage points.

The company continued to execute its planned sales and marketing strategy for the CDMA business, try to minimize the impact of its spending disposal and has achieved a stable operation of CDMA business.

As of June the 30th of 2008, CDMA subscribers reached 43.17 million, year-on-year up 8.2%. MoU per subscriber per month was 243 minutes. ARPU was RMB51.1. Revenue from CDMA business reached RMB15.53 billion, year-on-year down 2.3%, in which service revenue reached RMB13.11 billion, down 0.8%. Total costs and expenses, RMB14.65 billion. Profit before tax was RMB880 million and net profit reached RMB655 million.

In the first half of 2008, the company has spent RMB730 million in CapEx. In order to enhance GSM networks, improve coverage and network quality, the company has decided to increase the GSM CapEx from early announced RMB18.7 billion to RMB35 billion for 2008. Total CapEx for 2008 is adjusted to RMB47.25 billion. The operational cash flow from continued operations was RMB14.22 billion and free cash flow was RMB6.92 billion.

Looking forward to… in the second half of 2008, the company will put its full force in developing GSM business. Firstly, we increase the CapEx to improve GSM network quality. Second, we will continue brand marketing to optimize the subscriber mix. Third, we will increase the sales of standardized products to improve effectiveness of marketing spend... expenditure. And lastly, we will promote GPRS-based services as priority and further grow our value-added service business. And I believe all this will lay a solid foundation for the 3G business of our company.

Now, I would like to invite our Chairman and CEO, Mr. Chang Xiaobing, to share with you the two major transactions and the future outlook of the new company. Thank you.

Chang Xiaobing - Chairman and Chief Executive Officer

Thank you, Mr. Tong. Next, I would like to give you an overview about the two transactions.

Regarding the transaction arrangements and also the schedule. So, the first upcoming TBT [ph] is about the transaction structure, the next one about the disposal of CDMA business and also the merger with Netcom such as acquisition method, exchange ratio, new company name, new management team, integration plan, etcetera. And next one is about the post-transaction shareholding structure and the next one is the pro forma financials for the year 2007 for your reference. And then finally, I'm going to share with you the expected timetable.

So, I'm going to continue with my presentations. Firstly, the reasons for these two transactions. So, firstly, we believe this will help the clarified or clearer strategic positioning of the company, because it's going to be really difficult for the company to operate two 2G networks at the same time. Selling CDMA business and merger with China Netcom will help the new company to obtain the WCDMA license.

In the 2G market, the new company will focus on the development of GSM business and continue to optimize the network coverage and improve the communications quality. After being granted the WCDMA license, the new company will gradually establish its leading position in the 3G market.

Second, the transactions will help the company to establish the full-service platform. On one hand, with a full-service platform, the new company could enhance its brand awareness by providing a full spectrum of services and high value-added products to satisfy the increasingly diversified demands of the telecommunication services.

On the other hand, the new company will further enhance its competitive advantages in Northern China by fully leveraging other radiating facts of the leading position of Beijing, the capital of China and providing integrated telecommunication solutions. The new company will further expand its new business.

Third, the transactions will help to enhance the company's scale and capabilities. After the transactions, the new company will become one of the global leaders both in terms of the overall size and the subscriber base. And the market position and influence of the new company will be fully enhanced and improved. And this can be reflected in the market capitalization as well as the number of subscribers. In addition with the increasing total asset, net asset, revenue, and EBITDA, the new company will optimize its resource allocation and increase the investment in core business such as wireless broadband and value-added services.

And fourthly, the transactions will help to realize the resource sharing between the two companies. The dramatical increase to diversify the subscriber base including government enterprise family and retail customers will create a substantial bundling and cross-selling opportunities.

And secondly, we would realize more extensive channel coverage and reasonable layouts through the integration of channel resources to improve its self-operated channel capacity and overall channel operating efficiency and reduce the marketing and sales costs. Thirdly, that would facilitate the centralized planning of operation maintenance and the investment of the new company through network and resources sharing and improved operation and maintenance efficiency in a safe CapEx in the aspects of transmission, base stations, and Internet stations.

Finally, let me make a brief introduction on the outlook of the new company. Given the continuously rapid macroeconomic growth of China and a relatively low mobile penetration rate, we believe that Chinese telecommunications industry has broader growth prospects, which provide a strong basis for the further development of the new company and that, especially the adoption for broadband and the development of the 3G business will drive the future development of the Chinese telecommunications industry as well as the new company.

We believe that the new company has the following three competitive advantageous. First of all, the full-service capabilities in the ten Northern provinces of China. The new company, we have the most balanced, comprehensive full-service capabilities with abundant backbone Metropolitan Area Network and a Gateway network resources in the ten provinces in North China and established a leadership in broadband and the fixed-line businesses.

In addition, the new company will also enjoy a radiating effect of the capital of Beijing... the capital of China, Beijing. Secondly, the new company will be well positioned for the 3G leadership. The new company is expected to obtain WCDMA license after the transaction.

At the end of 2007, the global 3G subscribers are about 290 million or about 8.6% of the total mobile subscribers, among which 200 million or 70% are WCDMA subscribers. And WCDMA is the most widely adopted 3G technology globally with rationalized quality-price ratio and mature applications, as well as the rapid and accelerated growth in number of subscribers. We firmly believe that this would help the new company to realize a rapid and excellent development.

Thirdly, the new company would have comprehensive resources for international business expansion. With the development of globalization and continuous development of the Chinese economy, we believe the international business has great potential and the non-voice international business will grow very fast.

After the transaction, the new company will possess the most comprehensive international network assets in China, paving the way for the expansion of overseas businesses. Meanwhile, the new company has established a long-term cooperation with over 400 global operators, organizations or institutions representing a broad future or prospects in international collaborations.

And the new company will be committed to developing in itself into a world-class broadband telecom and information service provider with a department plan for various main lines of businesses, especially first of all, wireless business and the new company will make best efforts to garner a leading market position in terms of the 3G subscribers while maintaining stability in the 2G market share to secure a stable growth of the overall market share. And the new company will realize the stable ARPU growth of the overall mobile business to enhance customer value. In addition, the company will try to establish leadership in the value-added business as a percentage of the total revenue.

Secondly, for the fixed-line business, the new company will maximize customer value and stabilize the number of fixed-line subscribers in the voice service business through bundling, terminal integration, and service innovation. In the area of investment, the company will further optimize return from future investments in fixed-line business according to the overall business development strategies and centralized planning with the ultimate goal of meeting the need of a new business development.

Thirdly, for the broadband and Internet business, the new company will continue to focus on broadband construction and reinforce the integration of access with data, contents, applications, and multimedia and to consolidate the leading market position in the ten provinces in North of China and steadily extend into China's South market by effectively utilizing customer and the network resources. And the new company will aggressively integrate the resources in the mobile, fixed-line, and broadband areas to establish an integrated and administrative system to support the comprehensive business and operation.

In order to achieve the above target, the new company will implement development strategies in six major areas, including 3G business, full-service platform, broadband and multimedia services, capital investment, customer and distribution channel resources, and the service awareness and quality.

And the following section will be focused on the major strategies. First, to establish the 3G leadership and to promote brand image and the core competitiveness. And the new company will start with improving GSM network quality to lay out the foundation for the 3G development while enhancing 2G capability. And after getting the 3G license, we will increase investments in 3G network and business, actively expand medium to high-end markets and gradually launch premium 3G products and services to market from the long-term mobile focus on 3G business and significantly improve overall telecom service capabilities and the value-added services and enhance the branding image and core competitiveness.

And secondly, we would elaborate the full-service platform advantage to drive product innovation and market expansion; on one hand by leveraging the technology experiences and business capabilities in mobile and fixed-line sectors, will push the convergence of the mobile and fixed technologies and business and to establish an integrated supporting system for the comprehensive business operation; on the other hand by learning from the experiences in international market and the new company will enhance the innovation capabilities to meet the increasing market demands, especially demands for the new services.

And thirdly, would rapidly develop ourselves into a broadband and information and a mobile service provider and we will rapidly develop the broadband and multimedia business speeding up the transformation into an information service provider with the growth of domestic and demand for telecom service, broadband, and ICT businesses have shown strong growth momentum in since years [ph].

And the new company will further enhance its development model through innovative services such as combination of access and content and promote Internet-based applications and content. And at the same time, the new company will actively develop the ICT business to serve the information demands of domestic customers including government and the corporate customers flawlessly. We would further optimize the capital investment structure.

The new company will centralize planning of the investment and in 2008, we would increase the GSM investment and prepare for the 3G business, and in 2009 and 2010, the CapEx is expected to be approximately RMB100 billion for wireless business focusing on 3G. Our CapEx plan is based on market, development landscape, technology-evolving trend, and the company's own characteristics. We believe that the above-mentioned investment in 2G and 3G businesses will have a significant impact on the new company's future development.

The above is my introduction of the new company's future development strategies. Thank you.

Tong Jilu - Executive Director and Chief Financial Officer

[Foreign Language]. Thank you, Mr. Chang. We’re now ready for questions. We would have a simultaneous introduction... interpretation.

Question and Answer

Unidentified Analyst

We have three quick questions. First, going into 2009-10, you help us to understand what is a sustainable EBITDA margin for your mobile business? And then, second question is, among your existing GSM subscriber base, can you give us an idea roughly what is the percentage that are corporate customers? And finally, on the CapEx planning is…. of the revised CapEx spending, can you give us a rough idea how much is spent in urban versus how much is spent in rural? And given that the EGM for the merger will be in September, middle of September, so should we expect that or that increased CapEx spending will happen in the fourth quarter of this year? Thank you.

Tong Jilu - Executive Director and Chief Financial Officer

[Foreign Language]. [inaudible] The EBITDA margin for the first half of this year is slightly lower than the same period of last year. And that was due to the overall economic environment and also some operational reasons. Therefore, the EBITDA margin in the first half of the year was slightly lower than the same period of last year. Well, from the policy point of view, we know that we have changes from the roaming tariff which given a loss of RMB6 billion this year, in the first half of this year, the calling-party revenue increased by 4.2% year-on-year. However, the called-party revenue decreased by 20% year-on-year. And our goal is that we would try to make... maintain the EBITDA margin stable at 43.6% and that is for the 2G GSM network.

Chang Xiaobing - Chairman and Chief Executive Officer

As to the CapEx, the CapEx structure for rural and urban areas, I said that just now, we will increase the CapEx, especially for the coverage and the quality improvement in 50 cities… key cities. We have realized that we have to keep focus on the key cities for the development of 3G; however, we have to ensure that we have a good basis on the 2G network so as to prepare for the 3G.

For the 900 megahertz and 1,800 megahertz, we complained about the shortage of the 900-megahertz spectrum, but on the other hand, we haven't been determined to make the continuous coverage on the key cities on the 1,800 megahertz. And now, we have decided that we will make a continuous coverage on the 1,800-megahertz spectrum, which will not only meet the 2G demands but also preparing... but also lay a good foundation for the future 1,900 megahertz 3G business. I guess you would understand why we do so and some of the investors suggested that we can go faster and in a bigger step about we prefer a gradual way of going.

Unidentified Analyst


Unidentified Analyst

Two questions. First of all, following up on the issue of EBITDA margins, obviously your sales and marketing expenses as a percentage of revenues has been somewhat stable at around 15%. But I presume going forward into next year, especially you are going to want to see an acceleration in the market share as compared to what we've seen over the last couple of years. Do you think you are going to be able to see that increase in market share with a stable 15% sales to total revenue ratio, sales cost to total revenue ratio expense?

Second question just on your fixed-line business strategy, Unicom brings to China Netcom a nationwide network and with that nationwide network opens up the possibility that the such, I would call, friendly relationship between China Telecom and Netcom in terms of competition that's been in place for the last few years could be reconsidered. What is your strategy for nationwide fixed-line in terms of a competitive strategy, particularly in the 20 provinces? Is it much different than what’s been going on for the last few years which has been pretty minimal or do you see a lot more focus on fixed line after you’ve got the new group to run? Thank you.

Tong Jilu - Executive Director and Chief Financial Officer

Just now, I shared with you our EBITDA margin information. You might have noticed that for the next year, we would want to steadily increase our market share. But this increase in market share is based on our network coverage improvement and also the 3G construction would also help to improve the overall brand value and awareness. So, our overall goal is to stably increase our market share. And obviously, all this depends on our phone, whether we can get WCDMA license after our reform and restructuring.

In terms of our normal operation, in terms of network coverage, we hope that through our construction, we can improve our overall service quality. In terms of sales expense and also marketing expense, we want to achieve efficient growth. At present, the sale-to-revenue ratio is around 15.1%. I think, for the first half of this year, this is a reasonable goal. We want to fully utilize our expense to achieve quality growth. For our EBITDA margin, we want to stabilize.

Chang Xiaobing - Chairman and Chief Executive Officer

In terms of the broadband development strategy or competition strategy, I believe we have already shown you in our presentation and I understand in the ten Northern provinces, the growth of broadband network is going to be something we focus on in the foreseeable future and it's going to be our key business line. So in the restructuring and merger process of Unicom and Netcom, we have been thinking through... how through our integration, we can achieve faster growth in the ten Northern provinces in the broadband business. So I think further investment in the broadband business is going to be the way we adopt [ph] in the foreseeable future.

Unidentified Analyst

[Foreign Language]. Thank you for your answers. I've got two questions for you. For the second quarter, the revenue growth slowed down quite obviously, maybe this is because of one-way tariff charge and also the roaming tariff adjustment. I guess it also has something to do with your overall macroeconomic environment because the price elasticity was very poor in the second quarter. So I'm wondering if you've taken this issue into consideration in preparing the results. Another thing is you are emphasizing that 3G is going to be the key business for the new company in the future. So can you share with us certain of your development goals for the upcoming two to three years’ time? So, for example, how much percentage are you going to have of the 3G market?

Chang Xiaobing - Chairman and Chief Executive Officer

So, I will answer your second question first, because it's going to be one question everyone is... want to know. So, obviously I understand everyone is very interested and also our presentation actually spent with some words on the 3G market. For example, what kind of market share will the new company have of the 3G market. We studied the global 3G market very carefully in the past days, so just now I'll share you with some of the data by the end of 2007 for the 3G market. However, in different regions or countries, the figures are quite different. So given China’s current status and development, the time is going to take for us to reach the penetration for the 3G network is going to be much shorter than our peers in other parts of the world because we have a plethora a different handsets and also the technology available. So to achieve the same market share, I think the timeline will be much shorter than our peers.

And secondly, if we all agree with the forecast made by the government authority or research institutions regarding the 3G development’s path and also the investment bank’s forecast for the 3G development, by the year 2012, the total mobile subscribers will be over 900 million or around 1 billion. So, this give us the overall scope of the market or size of the market for the 3G by the end of last year. And the 3G subscribers account for 10.6% of total mobile subscribers. And China's mobile subscribers account for 70% of the world's total.

So, based on this data of the first half of this year and also 3G developments in Europe and also in neighboring countries, signs indicate that 3G growth is much faster than 2G growth. I think forecast alone is not enough, we must base it on solid facts, because if you look at... take a look at the growth in the European market for 3G and 2G and also in Korea and in Hong Kong, we have reasons to believe in the next years 3G penetration is going to speed up and according to our research commissioned by the consulting firms, it's generally believed that by the year 2012, 3G subscribers in China is going to account for around 20% of the total number of mobile subscribers in China. So, if you want to make some modeling, then you might already have all the necessary data based on my answer.

So what percentage will China Unicom have then you might want to ask, I have mentioned this in my presentation, so the new company have the one and only WCDMA license and I would assure you that we will be very confident to at least retain or improve on today's market position. In the first half of this year, China Unicom is faced with a restructuring, we try to stabilize our team and want to achieve stable growth. So our analysis was quite reasonable and normal. Our revenue was only RMB200 million and lower. This is very much a result of the roaming tariff adjustment in April.

Unidentified Analyst

[Foreign Language]. Thank you. I have got two questions. The first question is, not long ago, you have provided some documents and information; for example, you want to stabilize other current or retain current ARPU. So is it only for the year 2009 or is it for the long term? The second question is regarding the CDMA purchase made by China Telecom recently, since that… their actual expenditure was much lower than originally forecast. So will this have any impact on your CapEx of RMB100 billion or do you actually thinking... are you actually thinking of making some adjustments to that CapEx plan?

Chang Xiaobing - Chairman and Chief Executive Officer

I am very glad to discuss these two questions with you. Regarding the ARPU value, yes, it's something we are all very interested in. We… before we do the WCDMA business, we run both CDMA and GSM business. So we're very much use the CDMA network to service the middle and high-end market, that’s due to the differentiated functions and also the high subsidy for the CDMA. We very much adopt a follow-up… a following strategy. So once we disposed of the CDMA network, we realize that such kind of subscriber structure is not good enough. So given this situation, we want to increase investment to improve our marketing and sales and improve our management. We very much hope that so we can do better but today, I can't make you a solid promise here that we are more focused now with the disposal of the CDMA business. So I think we can... you can be assured that we will do better and catch up in the upcoming future, and we're very confident in that and we believe such kind of change will happen.

Your second question regarding investments or CapEx plan. So, China Telecom has a much lower purchasing expenditure than originally expected. So, as an outsider, it's not convenient for me to comment on their practice. I think for the telecom industrial sector, this is actually a common phenomenon. So, for large-scale equipment tendering, normally the actual expenditure is much lower than the plan. I got this based on our base station construction in the past few years. You might already have noticed this, and I believe with the huge tendering… upcoming tendering projects for the 3G business, I think the same thing is going to happen.


And then we've got Jeffrey.

Jeffrey Tan - Credit Suisse

Okay. Thank you for the presentation. I just have, what, three questions. First is related to CapEx. I'd like to know the RMB100 billion CapEx that you plan for '09 and '10, would that be the peak or should we expect that to continue to rise? Secondly, can you share with us what kind of subscriber capacity that will give you something that China Telecom shared with us as well? And lastly, just your view on asymmetric regulations, timing and what type of preferential treatment if you will do you expect? Thank you.

Tong Jilu - Executive Director and Chief Financial Officer

For the RMB100 billion in CapEx, this was actually said in our circular sent to the shareholders, and that was the CapEx for the mobile businesses, especially the 3G for 2009 and 2010. And after the merger of the companies, the annual cash flow would be RMB65 billion and operating cash flow would be RMB130 billion after merger. And the net cash from the CDMA disposal would be RMB30 billion. So, in the future, two or three years, RMB100 billion CapEx would be reasonable and the most used CapEx will happen in 2009, accounting for 70% of the total CapEx, while the rest of this 30% will happen in 2010. Thank you.

Chang Xiaobing - Chairman and Chief Executive Officer

For the asymmetric policies, this is a frequently asked questions, and this has been asked on several occasions, and I guess this question was also asked in the meeting of China Netcom. Well, we have a common understanding, first of all, it is already clearly said by the government or promised by the government, I believe that the government will fulfill this promise, and secondly, the related government departments are really making intensive efforts to study on that and to discuss on those asymmetric policies.

To some extent, operators or businesses are also involved in the discussion and what kind of asymmetric policies will there be, I guess some of them are commonly used in the global market in order to curb the dominance of one operator and of course, I don't expect that we would have seven or eight asymmetric policies overnight, because it's a gradual process and the government would be very cautious in that and I guess there will be one or two asymmetric policies coming up first and then others policies will come up later.

And probably some of the policies will be a follow-up or a follow-up policies of the current, existing measures and policies. And nowadays between the fixed-line and mobile, the settlement policy is asymmetric policy and in the future among the mobile networks, whether or not there will be an asymmetric policies, I cannot give you solid promise, but let's get a --.

Unidentified Analyst

Thank you. Thank you, Mr. Chang and Mr. Tong. I have two questions. The first question is the acquisition of the high-end customers and we probably... we're seeing that China Unicom will probably need some efforts to optimize the GSM structure… customer structure in order to move up to the high-end customers. And my question is, in acquiring the high-end use, we would use WCDMA or HSDPA technology, so would that mean that we have to give the handset a subsidy and which one will be the focus? Is that... would that be HSDPA or WCDMA?

And the second question is that, in terms of the fixed-line business, it is reported that China Railcom has got a license to operate in Hong Kong. And I wonder if they would also be able to do the broadband business in North or South of China? Will that impact your business in the future? And for the asymmetric policies, just now I said that we are full of hope but we do not expect many policies coming up overnight. Well, yes, we actually pin a great number of hope on that. While this is a quite sensitive issue, I don't want to overstate that.

And as to the CapEx, you just now mentioned 50 key cities. Will that be mainly the urban cities? So what about the rural areas, because China Mobile already has a deep penetration in the rural areas, so would you consider they sharing of base stations with China Mobile?

Chang Xiaobing - Chairman and Chief Executive Officer

Okay. I would try to answer you. And for the 3G, everybody wants the high-end customer, but we have to have a right understanding of that. What kind of services are we using 3G to provide to customers and what is the relations between 3G high-end customers and the 2G customers, and what is the differentiated services providing to the high-end 2G customers and high-end 3G customers? So, after answering all that questions, we can have a clearer picture of the future business strategy and we will have incremental market for the high-end 3G customers if we can consider or study this issue from different perspectives and angles. In that way, we can be more relieved facing the fierce competition. And it's not just to say that we are fighting for the high-end customers and we have to have very clear business strategies to acquire the high-end customers instead of being limited to the fights with other operators.

Well, the next question is about the China Railcom issue. Well, in this... after this restructuring of the telecom sector is completed, the three major operators might be able to operate full service. Obviously, we need to wait and see exactly whether there is going to be any specific… policies regarding market access into their specific business line. So, at the time, we can't make a judgment yet.

For China Railcom, once it's merged by China Telecom, just like after the original China Telecom and China Netcom want to compete with each other in their respective major business region. And for Railcom, it tries to expand its broadband business. In fact, this is something they have been doing in the past few years. The difference now is that after they become part of China Telecom, they've got more resources, especially capital.

Tong Jilu - Executive Director and Chief Financial Officer

And with fixed mobile convergence, I think they will be more changed in terms of business models. So, in the interest of time, we've got time for last two questions.


Our colleague from Morgan Stanley.

Unidentified Analyst

Thank you, Mr. Tong and Mr. Chang for your answers. Just now you mentioned about RMB100 billion CapEx, how about depreciation? What will be the trend of the depreciation? When will it click?

Tong Jilu - Executive Director and Chief Financial Officer

Just now, our Chairman mentioned a very important point. Our investment must be in proportion to the output as the initial start-up investment in 3G in the initial stage, there will be some impact; however, we want to minimize this impact by utilizing the mature networks. When we studied the models, we have set our goal to achieve a positive EBITDA one year after our investment in WCDMA and in two years’ time, we would turn it profitable and make positive contribution to the company. The last question, Helen.

Helen Zhu - Goldman Sachs (Asia) L.L.C.

Helen from Goldman Sachs. I'm sorry but I've got three questions. Question number one, in your presentation earlier, you want to maintain your market share in the 2G but I understand currently your market share in the 2G market is slipping or declining. So after the restructuring, by expanding your sales networks and channels, you can maintain your market share in the 2G market. So, if you can get... second question, if you can get the 3G license by the end of this year, then can you give me a timeline as to when you can introduce the 3G business? Are you going to start with a few piloting city or are you going to launch it nationwide after all the networks are in place? Another is your dividend policy, based on your CapEx plan, how will you adjust your dividend in future?

Chang Xiaobing - Chairman and Chief Executive Officer

Regarding our market share in the 2G market, I think your understanding is correct, but whether we can achieve it, we’ll have a wait and see, because it takes a lot of efforts. We have made an investment, we have been very focused and dedicated and to some extent, we are not really a full competitor against China Mobile. As you can see in the first half of this year, the GPRS business has made positive contribution and offset the decline due to the roaming tariff adjustment.

As for dividend or dividend policy, after China Unicom disbursed off its CDMA network, you might see that we've made some gains or we've some cash, but we will still need to make other investments, for example, in the 3G business. So I think for the new company, we have lot of opportunities but those opportunities will come at a price of investment. So, as for any new dividend policies by the end of this year, I think I will share with you once we have those new policies worked out.

As for the timetable for the launch of 3G service after we've got the 3G license, so government has stated, once we’ve completed the merger, we will get the 3G license. Currently, we're making lots of preparations for the 3G business and also we're also preparing for the construction work once we got the 3G license. I think it's going to take some time. So if we can get the 3G license by the end of this year, it’s likely that we are going to offer 3G service in quarter three of next year. Of course, everything is still pending on the 3G license awarding by the government.

Unidentified Analyst

The last question for ABN [ph]. Just now, I attended the meeting of Netcom. They said that it takes one year to complete the integration. So, I'm interested in your compensation standards and also the management team change.

Chang Xiaobing - Chairman and Chief Executive Officer

This is one question I'm most... I'm least inclined to answer because at the present, we’re still in the… this negotiational or discussion stage. Even if we merged, our parent call [ph] are not merged yet. So, there are several key points in time. So we have to, first of all, decide on the Board and also the management team for the new merged company. So, I think, this is something we need to clarify if it's on the member of the Board and also the top management and also the headquarter of the merged company, I think we have to be patient.

In terms of this organization structure of the merged company, obviously we’re still consulting some intermediaries or consultancies. So, after the merger we think that the management team is going to be huge. So, we have a lot of people and also we need to think how we can work out an effective mechanism to motivate the staff members or the management. So, I'm thinking of further innovation and find new management ways.

Okay. So that wraps up today's announcement. Thank you for your participation.

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