Chunghwa Telecom Co., Ltd. (CHT) Q2 2008 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen, and welcome to the Chunghwa Telecom Conference Call for the Company's First Half 2008 Operational Results. During the presentation, all lines will be on listen-only mode. [Operator Instructions]. Now, I'd like to turn it over to Chairman Lu, the host of the conference. Thank you. Chairman Lu, please go ahead.

Thank you, operator. This is Fu-fu Shen, Investor Relations Director of Chunghwa. Welcome to our first half 2008 result conference call. Today, we have Dr. Lu, our Chairman and CEO, and Dr. Hsieh, our CFO to speak to you. Dr. Lu will review our business outlook and Dr. Hsieh will go over financial results and business operations. At the end of their presentation, they will be happy to take your question. Dr Lu?

Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first half 2008 earnings results conference call. As I assumed this new position on August 20, I'd like to promise that under my leadership, the strategic priorities that we have previously communicated for our core business will remain effective. First, please note our Safe Harbor statement on slide number one. Before I hand this over to Dr. Hsieh, I would like to report to you that at the extraordinary shareholders meetings on August 14, two issues were approved by our shareholders. One is, to increase the company stock, capital stock by 20% from our capital surplus. The other is to subsequently reduce the capital stock by the same amount. As a result of these transactions, we will reduce our total capital stock by about 16%, up to 20% capital increase on the capital surplus. We expect the capital increase to take place in September. For the capital reduction a trading suspension is expected to be between the end of February next year and early March 2009, just before the cash payment date. Since the cash return is derived from our capital surplus and is deemed to be the shareholders contribution, there is no tax issue in this regard. Please refer to the right-hand side of the slides for the calculation of the difference price, following the capital reduction. In the future, our capital management priorities will continue to be first, investment in our core business, which has always been our primary focus; second, M&A opportunities in synergistic to our overall growth trends. Our third priority is to return cash to shareholders via capital reduction or share repurchase. Dr. Hsieh will now continue with our financial overview. Dr. Hsieh, please?

Thank you, Chairman Lu. Please turn to slide 4, showing us Chunghwa income statement on consolidated basis. Our total revenues for first half in this year were NT$100.9 billion, a 5.4% increase year-over-year. EBITDA increased by 2.6% to NT$51.5 billion. Operating profit increased by 6.7% to NT$32.3 billion. And the net income amounted to NT$23.2 billion, representing a decrease of 5.6%. Revenue growth was mainly driven by the consolidation of our subsidiary, Senao, and also strong positive contribution from our internet and the data business. About the operating cost and expenses, I'll explain on the next slide. While operating profit grew 6.7%, our net income decreased 5.6% in first half this year year-over-year, due to the unrealized mark-to-market loss stemming from the foreign exchange derivative contract. But we expect to benefit significantly from the recent NT Dollar depreciation in recent past [ph], some portion of accumulative allowance, for this contract. And on the right hand side showing the quarter results, now you can see the net income remains flat as compared to that of the second quarter last year. As shown on page... on slide 5, total operating cost and expenses for first half this year was NT$68.6 billion, an increase of 4.9% when compared to first half last year. As I mentioned on the previous slide, the increase was many attributable to the consolidation of our subsidiaries especially Senao. For the parent company, total operating costs and expenses decreased by NT$4.42 billion representing a year-over-year decrease of 0.7%. For the second quarter of 2008, total operating costs and expenses decreased by 2.7% and the decrease came mainly from decline in personnel expenses and depreciation. Since we do not provide an early retirement program this year until now and therefore incurred no direct expenses. On slide 6, we show the breakdown for... revenue breakdown for each individual business segment. The Internet revenue and our Data revenue continued to increase due to increased broadband subscriber number and their successful initiatives to upgrade customers to a higher speed ADSL and FTTx services. On our all mobile businesses, the positive effect of higher subscriber number which increased by 2.3% to 8.8 million compared to that at end of first half last year was offset by a decline in traffic and price cost imposed by the NCC, leading to a 1.2% revenue decrease year-over-year. On the Fixed-Line, for local and DLD, ILD in all decreased compared to last year but this is consistent with global trend. And as you can see the... on the bottom the other revenues increased by 123.3% mostly from consolidation of Senao. On the right hand side, showing the second quarter results and please refer to that. Now please turn to page seven, showing our cash flow performance. You can see the free cash flow for first half of this year increased by 31.4% when compared with first half of last year, as the increase of CapEx was smaller than the increase in cash flow from operating activities. Our cash and cash equivalent amounted to NT$95.4 billion at the end of this year, our first half, an increase of 15.8% despite the capital reduction cash payment of NT$9.6 billion in January this year. Next, on slide eight, CapEx for first half of this year was NT$11.3 billion, an increase of 16.7% year-over-year. This was mainly due to an increase in our spending of NT$1.2 billion for repurchase of state-owned land where one of our outlets is located. Going forward, our CapEx may increase due to investments focused on our core business and our efforts to migrate mobile and data customers to higher revenue platforms, including 3G, 3.5G systems, IP-based NGN, FTPx and xDSL. Now business overview; our slide 10 you can see that Chunghwa Telecom's total revenue for first half of 2008 was NT$100.9 billion of which 28.5% came from fixed line, 35.9% from mobile, 24.6% from internet and data service and 11% from other, which includes a new revenue stream from handset sales, following the consolidation of Senao into Chunghwa Telecom. Revenue from handset sales, including handset sales from Senao into Chunghwa Telecom accounted for 8.2% of our total revenue. As a result, revenue for fixed line, mobile and internet and data as percentage of our total revenue decreased due to this new revenue stream. Chunghwa has commanding first place market position for each of our big segments. Please see right hand side table for statistics. Next slide 11; Overall [ph] review our broadband progress. Our broadband subscriber number continues to increase over the 4.3 million broadband subscribers at the end of first half 2008, close to 70% use service with speeds higher than 2 Mpbs. Internet value-added services drive the broadband service revenues. Top contributor includes land administration information service and our internet pornography gatekeeper which accounted for 32% and 9% of VAS revenue respectively. The fastest growing VAS are internet advertisements and the internet pornography gatekeeper which exhibited year-over-year gross of 111% and 81% respectively as of June 2008. Total Broadband access revenue was approximately NT$10 billion which was 0.8% higher than that for the prior year period. The growth rate is lower than before due to the tariff cuts imposed by the NCC. Now as shown on slide 12; our key initiative for the broadband business are first, to migrate our customers to higher access speed. And second, to increase to... to continue to increase our fiber coverage by deploying fiber networks in residential buildings, campuses and commercial buildings, allowing more opportunities to access and adopt a variety of internet value added services. These initiatives have shown satisfactory progress. As you can see on the right... left hand side of this side, that average bandwidth per user continues to increase over last few years and has reached 3.9 Mbps at our first half this year. In addition about 1.4 million broadband subscribers utilize a service speed of at least 8 Mbps, representing about 32.1% of our total broadband subscribers. The number of fiber subscribers has also shown strong growth with 782,000 subscribers at the end of first half this year. In addition I would like to emphasize that the 16.4 thousand plus building to which we offer fiber access service will be then about 90.7% market share. Going forward, we expect this trend of growing broadband business to continue. Now, I want to talk about the mobile operation. Chunghwa Telecom has maintained its number one mobile market share position as shown on slide 13. At the end of this year, first half, we had 8.8 million mobile subscribers, including 2.9 million 3G customers. 3G subscribers as a percentage of the total mobile subscriber base has continued to increase. Of the 2.9 million 3G subscribers, 70% utilized 3G handsets. In addition, 11.6% of 3G ARPU was from data usage, compared with 7.6% for 2G ARPU. Moving to slide 14, I want to provide some more detail on our 3G initiative for our mobile business, especially value added service. For business customer, we offer a customized service called mPro, along with customized handset models. In addition, we keep enhancing service on both the server and the user end, to meet and exceed the requirements of this important market segment. ARPU for mPro service subscriber was almost NT$1,650 of which NT$500 is from VAS usage. To attract young customers, we offer mCool services with itemized and affordable VAS packages and handsets. ARPU for mCool users is NT$990 and NT$55 of that is from VAS usage. We anticipate to have 100,000 subscriber for both mPro and mCool service by the end of this year. During first half this year, we were encouraged by our mobile VAS growth, primarily due to the success of our exclusive mobile VAS platform, emome. Total VAS grew by 31.7% year-over-year. Of this mobile internet experienced the highest growth, which was 58.2%. As a result, data revenue as a percentage of mobile revenue increased to 9.4% for this year first half. Next, on slide 15, we reviewed a fixed-line sequence. As an incumbent we had a stable market share for Local DLD and ILD business. We have been successfully defending our fixed-line market share, and are confident that our strong market position will sustain. Regarding to our convergence services, you can move to slide 15. Let me update you on our progress in convergence services. By the end of first half of this year, they were about 508,000 IPTV subscribers, growth of 29%, as compared to the end of last year. Furthermore, we are continuing our effort to construct a user friendly platform, and then to increase the content. This platform includes MOD for IPTV, emome for mobile service, and hiChannel for ISP Service. To explore synergies of these three platforms we conduct cross platform marketing and advertising operations. We also provide integrated bill for multiple service, as a convenience to customers and then to streamline our own operations. Finally, we are improving our customer interface, to enhance customer loyalty. Here, we are focusing on promoting the ever popular sports program over those three platforms. We will also keep enhancing the content of other VOD, and to provide the interactive value-added service, such as games, karaoke and exclusive service for corporate customers. To provide high quality services, high-density TV programming has been available for documentary and the feature film, as well as the Beijing Olympics game. Now, I want to talk about the result we gained from the Olympic operations. The 2008 Olympic Games were truly a great event for us. We were able to increase our IPTV and our fiber subscriptions, leveraging this worldwide event. Specifically, IPTV or MOD subscriptions increased 14.3% in August 2008, compared to net average in monthly subscription from January to July this year. Fiber subscription also increased 6% in August, with respect to the same timeframe. The 2008 Olympic Games also played an extraordinary important role for the growth of VAS across our three platforms, MOD, emome and our hiChannel platform in August. According to our internal statistics, during the Olympics game from August 8th until August 24th, the highest number of viewer household for MOD was up to 1.6 times compared to before the Games. HiChannel visitors were 3.3 times and our page view amounted to 11.3 times compared to before the Games. Number of video clips viewed, page views and traffic over our mobile portal emome were 15.8, 10 and 10 times, respectively and as compared to period before the Games. As a result, we are pleased of our successful promotion for Olympic Games broadcast. Through this event we were able to enhance leadership in a new media, improve our branding and re-affirm our expertise. This completes my business review. Now, I will pas the call back to Chairman Lu for our business outlook.

Thank you, Mr. Hsieh. Next I want to take a few minutes to discuss our business outlook. Chunghwa Telecom is the leading integrated telecom operator in Taiwan. One of our strength is our ability to upgrade our infrastructure and to offer new services or better services to our customers enjoy the new development in telecom technology. So, originally announced in 2006, the deployment of next generation network is one of our operational priorities at this stage. The NGN will consolidate our existing diverse networks including PSTN mobile on internet onto one single comprehensive IP based network. With this solid foundation, we are capable to develop versatile new multimedia, value added services. The IP Multimedia Subsystem or IMS will be used to aid multimedia and voice applications across wireless and wireline terminals. With application layer, we will introduce an open service platform in order to open the NGN functions to expand our service applications. This means that whenever a provider wants to enable a new service, they can do so by defining it directly of this service layer without considering the transport layer. The bottom line is that, through the use of different access networks on the NGN we'll be able to consistently provide the same level of high quality service for customers no matter what device the customer is using to access such services whether it is the mobile handset, PC or a fixed-line phone. Slide 21 shows the roadmap for our NGN projects from 2006 to 2013. The NGN project involves three main transformations; switching network, platform network and Access network transformation. For the switching network, the exiting Class-4 and the Class-5 circuit switches will migrate to IMS. They expect to complete the transformation in 2014. With the platform network, we will support QoS service enabled services and adopt MPLS by consolidating the IP platforms. In the meantime, we will introduce NGSDH ROADM and OXC technologies to optimize the performance of the transport network. So the access network on the wireless side, we will expand 3G and the HSPA to boost mobile internet applications. We are also keeping a close eye on the development of LTE, 4G and Wi-MAX On the wireline side, our main strategy is to replace the copper wire with FTTx technologies. At present we are promoting FTTN and FTTB and expect to speed up the FTTH deployment in 2011. From today's construction of all three networks is on schedule. Next on page 22, specifically for the access network, our broadband construction and the fiber deployment plan is illustrated here on this page. Based on our current projection, fiber access is likely to exceed that of ADSL by year 2011. By the year 2013 we expect fiber messenger coverage to reach 83%. In addition, we anticipate significant growth in wireline VAS revenue in the next five years, while our broadband access and the broadband ISP to grow slightly. Currently the wireline VAS contribute about 6.3% of the total wireline revenue. This high speed access consolidated IP core network and IMS platform the NGL will lay the foundation for us to develop even more multimedia value-added services. We will be able to meet demand of multiple markets, which we classified into home market, personal market and enterprise market. Remember for the home market, the so called digital home services such as entertainment, surveillance and healthcare will be some of the new alternatives for us to explore. For the personal market the completion of broadband and mobility will enable us to provide certain advanced new services such as video phone, and m-commerce and location based services. With the enterprise market, we can help to enhance our client's competitiveness by offering services such as mobile office, fixed mobile convergence and IP-VPN. Last but not the least, operational priorities, we are at a very important and exciting time in our industry. There are many opportunities, but let me emphasize that we are and we will be focused on our core businesses. We will continue to deploying NGN network and optic fiber based local loops. We offer triple-play or multi-play service over this broadband infrastructure. We will also continue to enhance our 3G, 3.5G mobile services. In addition we want to promote more innovation. We will encourage all innovative efforts in new product and services development that will make the best use of our infrastructure and the service platform capabilities. The scope of our business will be enlarged and include certain areas in information and communication technologies, ICT, intelligence transportation Systems, ITS and applications that will enable low carbon economy in the evolution age. An example is our intelligence energy saving solution, iEN for commercial buildings. In the about two months of offering we have received over 150 inquiries and more than two-third express strong interest in accepting such solutions. All this are from our enterprise account. We will continue our work on property revitalization, so as to generating value on our existing assets. We will explore overseas business opportunities but with prudence. Furthermore we will continue to operate under the corporate social responsibilities for framework. Finally to make all of this happen we ought to make best use of both our human and capital resources. We were able to succeed so far primarily due to our talented and dedicated employees. We want to encourage continuous out performance among our employee base. In addition efficient capital management has been and will continue to be priority items of CHT. Now we will be happy be to take your questions. Thank you Question And Answer

Ladies and gentlemen [Operator Instructions]. Your first question comes from the line of John Kim with Merrill Lynch. Please proceed.

Yes, thank you for the opportunity to ask questions. I have three. First, congratulations to Chairman Lu for your appointment. As the new Chairman, but also as an executive who has been with Chunghwa for a long time, what are some of the changes or new initiatives that you have in mind for the company during your tenure? And second, could you please share your thoughts and expectations for changes that you anticipate from the new NCC? And third and last, is a light-hearted question. I recall that your 2008 strategy was OOOs [ph]. But, now that the Olympic Games are over, what are you going to replace the last O with?

Well, thank you very much for your encouragement. Well, as I mentioned during the last part of my presentation on the operational priorities, Chunghwa Telecom has a very solid tie breakers [ph]

Okay.

And I happen to be the one with all this strong tie breakers [ph]. And, I would like to continue to lead the company to be very much focused on our core business, okay. And as I said, the scope of the business would be enlarged, we include ICT, or certain areas of ICT, because ICT is very broad, okay. We opt to be focused on certain areas in ICT, and also, on law [indiscernible] economy. And especially, ICT can help other industries to reduce or to better use of their image and we have some success stories. But, we would like to pursue along this revenue. And, this will tell me, one thing that we will be focused, and we'll be focused on the area where we have expertise, okay. And as I said also, during the last few sentences, we'd like to align our human capital with all this needs, or new opportunities. And, this will be the priorities for me. On the changes of our new NCC, there are now seven members, and the new Chairwoman and Vice Chairman have already being elected. I believe the current composition of NCC members are much better than the first term, I mean the 13 or nine members during the first term of NCC. It's a... it's much more... it's like I believe has much better composition of expertise among commissioners. We would like to see the NCC to be more rational in 15 stage for converged, physical convergence to happen. And, not much had been heard from NCC. So, we will monitor as such their priorities. For the vendor income [ph] today, the chairperson led the team to the Nantou, the central Taiwan area for one of the activities they are very much focused on. And, we participated in this. And, one area I also understand of your focus is about universal service. And, I believe Chunghwa Telecom can contribute in this area. The three Os, mentioned kind of by our ex-Chairman Chendan[ph], and Dr. Hsieh elaborated a little bit on our... some elaboration on our experience with the Olympic. It's a great event and we can... well the forecast, the availability of the games from our three platforms is well received in Taiwan. And this clearly set the stage for New Media in Taiwan.

Okay.

And we will continue... hopefully good sports among other content and programs in MOD in or emome platform or even in our HiChannel platform and so we have... we believe we are doing quiet well in this 16 days. The three O's, the first O represents optical and optical is a very simple word, really means NGN and fiber to the X-solutions. O is the infrastructure we are constructing at this stage and we will continue this and this is the foundation for our new services. And the second O is oversea and I said that we will still continue exploring overseas opportunities but with great prudence, okay. So, that's my answer to your questions.

Thank you.

Your next question comes from the line of Lei Tang with Lehman Brothers. Please proceed.

Hi, thanks very much for the call. I have two questions. First can you give us an update on your overseas strategy especially with regards to China after opening up new offices. Second, are you still considering an early return [ph] in programs for the second half and if so have you decide the total number of reduction? Thank you.

Okay let me answer the second question first, the early return for once, we are at the stage of formulating a plan, may be this would be available for the end of September and then we will review whether this plan is feasible. If it is feasible then we will conduct a probably at the fourth quarter of this year and since the plan is under formulation and I have no package [ph] numbers at this stage, we will review the proposal, okay. And the overseas strategy is... let me put it this way; to exploit overseas opportunities we ought to understand and be knowledgeable about the targeting country, okay. This is number one. Number two is, we ought to know the culture and also the marketplace and hopefully it's not too far away for... hopefully it's not that far away. Under the service [ph] we would like to start with small and to gain experience because this is new, okay. We better test the water and then if we understand the pool is the right temperature, then you dive in, otherwise stay away. About China; China is a very interesting market and a large market, okay. We thought and that will see if there is opportunity for us and that's why we will open two offices; one in Beijing and one in Shanghai. The offices will help us to, one is to collect information and find a tinge of prominence [ph] there. Second is to help our operation to take care of some of our enterprise accounts who are investing in Mainland China. Somebody there can help to communicate at least the local office from either China Telecom or the New Unicom or even China Mobile. It's very important. That's the purpose of opening representative service office here. There are certain regulations that need to be observed, okay. One is the regulations imposed by Chinese companies and the other one is our own regulations here in Taipei, okay. And if it works [ph] then we probably will try to stop this small as I said to see if we can really perform in that market. Till the time we have more specific framework.

Thank you.

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

Yes, hi, thank you, good evening and Chairman Lu let me add on my congratulations to the recent promotion and my best wishes. I have three questions, sir. Firstly if I look at the slide you have put up in the presentation, I think it's page number 21 on the network convergence and the NGN road map. Could you give us some color on what kind of CapEx plan we should be expecting over this five year period and whether there are any changes in you CapEx plan for this year? My second question would be on the MOD subscribers. You've obviously crossed half a million subscribers now. Is there any data that you see emerging on ARPU or on the number of paying subs that you would like to share with us? And my third question would be on the derivative contract, has there been any progress on that, I mean is there any thing like trying to knock it off or is it just going to stay the way it is for the original terms. Any update on that would be useful? Thank you so much.

Okay. I am Joseph Shieh, CFO of the company. May be I just... I can answer this third question, you just mentioned about the foreign exchange derivative products. And toward the end of July, the massive market loss, we had a loss for this contracts about NT$3.16 billion. But since the August the significant new Taiwan dollar depreciation and we hope to be inviting back a significant portion of this unrealized loss. And we are... we will consider several options try to maybe hedge of our partial outlay or even outline if the NT$ opposed to depreciation level, they would further which means they'd be closer to the dollar. But now I'm not taking... making any strong conclusion right now because we still have several options on consideration right. Naturally we watch this contract closely and very dynamically and we found now it is very good timing and very good vehicle position [ph] to see the all option we already evaluating. And so the option you just mentioned on writing and recording, all will be considered, thank you.

Okay, your first question is regards to our NGN on this. The total CapEx for this quarter including across the core network and also the access network. The core network requires about NT$102.6 billion CapEx for five years. And the access especially the fiber solution FTTx in project for five years were about NT$50 billion. This is all the CapEx involved in this entire program. And all this is within our budget and we are able to fund all the required CapEx. For the MOD currently we have about over 570,000 subscribers. And during the August, this month the new applicants amounted to about 66,500 customers, the applicants for this month. The ARPU for MOD service is about 107 NT at this stage. Of course, our target is to increase ARPU, and also increase the number of subscribers along the way. And thank you very much for your kind --

What percentage of these subscribers would be paying subscribers?

Paying subscribers, yes, all are paying subscribers yes.

Okay. And if I could just quickly follow-up, therefore we should basically expect that the CapEx line for the next five years should be very much of what you've indicated earlier, around $30 billion, give or take per annum?

Yes, because this is very important period for infrastructure investment.

Yes, thank you. Thank you so much.

Yes, thank you very much.

Your next question comes from the line of Terry Chan with Credit Suisse. Please proceed.

Hi, thank you for the call. I have two questions. The first one is, assuming NT dollar remains stable at the current level, around 31.5, how much do you expect to write back in the third quarter? Do you some metric [ph] for it? My second question is, can you give us more colors on your land development project, because I heard you have just announced another project, which is commercial building project. Can you give us some color? And is it fair to expect you'll continue exploring the land value in 2009? Thank you.

Okay, I will answer [ph] the first question, now the product change, the label for the interim value is close to 31.5 and at least a five factor influencing the variation of this foreign exchange contracts. And I can just tell you is if the function is there is they remain in this [indiscernible], I guess 31.5, we would be inviting back very significant amount of the unrealized loss. So, but... for the exact number in I cannot give you right now, maybe tomorrow is the last day of not changing [ph] there this month. And I... once I got the closing price then we will use the financial model to pick out. But at this moment I cannot give you the exact number. About the land policies, we given our cash rich balance sheet, and also you see from the before [ph] the Taiwan property market had a little bit slowing down. And for this, for those land development project and our approach is it's taking long-term approach for our property management. And, first of all, we'll continue resuming our effort, and continuing our resounding policies. And then, we will wait for the strengthening of the property markets, then we will case-by-case and periodically bring the good project to our markets. But, I want to repeat again that we are taking a long approach, and that we are also more focusing on the rental income. Although, we rule out a possibility we also may have the same tip [ph] again from some residential buildings. But, I have for long-term approach we are more focused on rental revenues.

Okay, thank you. And now as a follow-up question, can you repeat the total budget for NGN, sorry I missed it.

The total budget for the NGN into --

CapEx budget.

Consists of two parts, one is the core network for the core networks its 22.6 billion NT. And for the excess, excess network especially, as the fiber solutions FTTx, FTTB, FTTN and eventually, FTTH. We totaled among that we totaled amount that we budgeted for, we planned for five years, it's about 50, five zero, billion NT.

Okay, thank you.

Thank you.

[Operator Instructions]. And your next question is from the line of Kathy Chen with Goldman Sachs. Please proceed.

Hi, thanks for the call. I have three questions. Firstly, we've being seeing quite a bit of mobile revenue softness in the industry. And, it seems like recently Chunghwa [ph] trends, there must be trends having softness as well. And it looks like mostly it's coming from ARPU weakness. Can you add some additional color on what you're seeing, and what's driving these trends? My second and third questions are follow-ups to previous questions, one is related to the oversea centers, I know in the recent Board meeting there was approval to I think fund certain [ph] Jack 3 billion into a Singapore venture. Can you talk a little bit more about this specific venture? And also I in the same Board meeting there was also approval on the Taipei 101 investment. Can you share with us how much that investment is, and how does this tie into your core business strategy? Thanks.

Great, the mobile business in Taiwan still in large the mobile market is still I believe rational. But, with certain turbulence, because some of the smaller operator, they offer very real suite [ph] packages to customers. And so, that has some impact on the traffic volume, and also on ARPU. And, our strategy to take care of this kind of marketing ... market situation is to promote value-added services. And also for selected segment of our customers, we offer customized handsets and also promoting data card usage. And this... all these efforts help to minimize, make this impact from some of this smaller operations. On the overseas project; you'd listened about the recent report at this meeting plus investment in Singapore due to our agreements with the party we are not able to make any disclosure at this stage and when the time has come, we will disclose what's involved in this program, okay. On the Taipei 101, we will participate in this capital increase for one from the company. And we just thought of the current percentage of our ownership okay, we'd just participate and with that, we by doing so is protect our interest in this investment, yeah.

Actually I have on follow up on the line about competition. Could you also talk about what you are seeing on the sick line side, as it seems like we've been hearing some noise from both Tower Mobile [ph] and [indiscernible] about talking. I am talking about building not more of the own back home line with their sisters acclaimed [ph] companies. So are you seeing any impact on your own fixed line business?

Yes, the market is rather dynamic and wee do not expect every body speaks to you everyday okay. so then I'm sure some movement in the market and then we observed what's happening and we monitor their activities quite closely and let me assure you that the our market share for proven excess remains high at 85% may be in a all comparatives we have forwe offer some attractive packages for the customers. But I believe that quality service field remains in top priority for our customers and we will maintain this kind of commitment to our customers.

Okay thank you.

Okay thank you

Your next question comes from the line of Henry Cop with Nextcase [ph] please proceed.

Good morning, and thanks very much for the call. Could you just give more detail on how the CapEx, the MGN CapEx will be faced, whether it will be fun [ph] loaded over the next few years or will it be spread evenly and what annual CapEx budget are you targeting?

Yeah, when we throw up or any operand we will have a very specific numbers for each year and I don't have the sheets with me all this projections of your CapEx over the next five years and... it's a for the first two or three years it's a relatively small and the pick will be of the year the sale on fourth year okay something like a bit [ph] yeah.

Okay. So what would be the starting rate I mean for example this year and next year?

Well that year was... we have spent two years okay, so next year probably we will have higher CapEx and the total CapEx will be between NT$30 billion to NDT$34 billion.

For 2008?

For 2009 or 2010 yes.

Okay thank you very much.

Okay thanks.

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

Yes thank you I have two questions first question is on your overall long term strategy of maintaining or even improving your margins if you look at your first half excluding others that include which would accomplish like handsets and would not, you actually show a decline in revenues, overall revenues. With revenue under pressure, what is it that you plan do to maintain your margins over the next 12 to 24 months, whether if it is under cost side or what areas of cost do you think you could curb in order to maintain your margins. And related to that do you see, which areas do you see with the most risk in the next 12 months in terms of the revenue decline. Second question on your free cash flow, it appears that in second quarter your free cash flow improved even though your EBITDA remain eventually the same and CapEx actually rose slightly. So could you just explain why the free cash flow increased? I would appreciate that, thank you.

Okay, the first question related to our margin and long term outlook. First let me emphasize that the current situation some decline in our fixed-line and also a year also and you saw the mobile, the mobile because of the NCC imposed this ex-rate [ph] in adjustment on the ex-rate in the tariff regime and also on the broadband access, it's again the NCC is integration. Actually the number of customers and the traffic is still growing. So we believe the market situation is not deteriorating in the sense of usage. Though we would like to focus on our core competence and we will emphasize more on and we would bring more products especially to our enterprise accounts. And we hope that this kind of effort will offset the declines in other areas. So on the regular side, we will do our best to sustain our revenue. On the costs side, as you've probably noticed and also as Dr. Hsieh mentioned during his presentation that the personnel costs still declining and depreciation is still declining. And due to competition and our expense for marketing and also from interconnection fees because of traffic, it's increasing. So we will control our costs through more efficient use of our manpower. And as I indicated as always we don't have definite time [ph] at this stage. We may come up through an early return program that could be not guaranteed, could be implemented during the first quarter of this year. From this competition in us as I said we... everyone understands here and we just want to see Shanghai move much faster and to get some gold medals now. We are monitoring on this market and we also face the competition. We will try to minimize our lease as much as possible. One area further if possible we would like increase ARPU from all MOD service. And if the regulation is such that we are not able to do so, that could be one off area, not to be able to raise ARPU in-house. We desire On the cash flow, yes, free cash flow--

Yes regarding the margin you have mentioned about that for the Chunghwa cum standalone actually our margin is above 54% EBITDA margin is close to ... is the same... is close to last year. Actually it's not declining. But if on consolidated basis we will be adding the subsidiaries till now then our EBITDA margin is close to 51%. So this is because of the consolidation basis. Regarding the cash flow, the high free cash flow is due to the effect we have low capital expenditure for the first half only given periods and they ...that's why we have the high free cash flow. Thank you.

Okay. Thank you very much for participating in this conference call and we will do our best to sustain our value and or even to improve our value to our shareholders. Thank you again. Good night from Taipei.

Thank you Chairman Lu, that is all for today's conference call. Replay details will be available on CHT website at http://www.cht.com.tw/ir. Thank you for participating in today's conference. You may now disconnect. Have great day.