Fu-fu Shen – Director, IR Mu-Piao Shih – President Bo Yung Chen – CFO.

Danny Chu – Macquarie Securities Steven Liu – Standard Chartered Chate Bend – Credit Suisse Tina Hou – Goldman Sachs Sachin Gupta – Nomura Alen Lin – BNP Paribas.

Good afternoon, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company’s Third Quarter 2014 Operating Results. During the presentation, all lines will be on listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question-and-answer session.

For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within an hour after the conference is finished. Please visit CHT IR Website, www.cht.com.tw/ir under the IR Calendar section. Now, I would like to turn it over to Fufu Shen, the Director of Investor Relations. Ms.

Shen, please go ahead..

Thank you. This is Fufu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our third quarter 2014 earnings results conference call. Joining me on the call today are Mr. Shih, President and Mr. Chen, CFO. During today’s call, management will first discuss business, operational and the financial highlights.

Then we will move onto the Q&A session. On Slide #2, please note our Safe Harbor statement. Now I would like to turn the call over to President Shih..

Thank you, Fufu. Hello everyone, this is Mu-Piao Shih. Thank you for joining our third quarter 2014 conference call. According to a NCC press release announced last week, total 4G subscribers on October 15 reached 1.65 million.

With this, we believe that our 4G market share has already exceeded 35% and we are in the leading position in Taiwan mobile market. We are working aggressively within our company and with our partners to enable and facilitate the 4G service promotion.

Part of the reason we saw strong 4G subscription momentum, was due to the long awaited iPhone 6, which went on sale in September. However, we have been concerned about the supply shortage of iPhone 6 handsets, which may impact our year-end revenue guidance.

Also, as we continue to regularly and carefully review our CapEx budget and execution plans, we will focus on ensuring optimal return through the cost effective spending, as well as the precision construction. In addition, our CapEx outlay will continue to focus on 4G network deployment and fiber broadband construction.

The fiber broadband investment will predominately emphasize FTTH construction, instead of network coverage enhancement. Therefore, it is possible to realize more than 10% reduction in budgeted CapEx for this year. Slide 5 provides an update on our mobile business.

During the third quarter, mobile VAS revenue grew by 22.1% year-over-year, mainly driven by the 29% increase in mobile internet revenue. Entering into the new 4G era, our mobile business strategies are focusing on 4G service promotions, followed by expanding the 4G device profile from high-tier to mid and the low-tier.

The migration of our 2G customers to the 3G or 4G network is also part of the strategies to promote data service. Meanwhile, we will accelerate 4G network deployment to reach population coverage of 90% and 99% by the end of 2014 and 2015 respectively Moving onto Slide 6.

For the first nine months of 2014, we saw a net increase in mobile internet subscriber of more than 950,000. We expect to reach our 1.1 million net-adds our target for the year, which is currently ahead of schedule. From our internal calculation, ARPU for 4G subscribers in the third quarter exceeded the ARPU figure for our mobile internet subscribers.

Slide 7 shows the results for our broadband business. During the third quarter, we continued to see a steady migration of subscribers to higher speed fiber services. We witnessed almost 300% year-over-year growth in subscribers, opting for connection speeds of 100 megabits-per-second or higher, reaching about 752,000 by the end of September 2014.

We will continue to encourage our subscribers to migrate to higher speed fiber offerings. This year, we launched 300 megabits-per-second fiber broadband services to keep ahead of the competition. We will continue to promote convergence plans, which combine the broadband and the MOD services.

In addition, we are planning to include 4G mobile services in a new convergence plan to stimulate fiber migration and MOD and 4G subscriptions. Moving onto Slide 8. Our IPTV revenue in the third quarter 2014 increased by 23.2% year-over-year.

Moreover, the household TV usage rate continued to increase to 61.9% over the past several quarters, demonstrating our success in boosting customer stickiness on our platform. In addition to the fiber convergence plan, which boosted IPTV subscriptions, we will continue enriching local content and the VOD program.

We will also focus on optimizing the MOD cost structure to enhance capital efficiency. As mentioned, we are planning to offer a fixed and mobile convergence plan, so that the 4G subscribers who also subscribe to the convergence service can enjoy MOD programs over their smart devices. Please see Slide 9 for an update on our ICT and cloud initiatives.

We will continue to leverage our core telecom infrastructure and services to expand the ICT business, including cloud services, enterprise total solutions and the government projects. Although relevant revenue from this area will be less than 5% of our total revenue in 2014, it is expected be more significant in 2015.

Now, I would like to hand it over to Mr. Chen to go through our financial results..

Thank you, President Shih. Now I will review our financial results in detail, beginning on Slide 11. On Slide 11 are our income statement highlights. For the third quarter of 2014, total revenues decreased by 1% and operating costs and expenses increased by 1.9% year-over-year.

Our income from operations and net income decreased by 11.3% and 8.8%, respectively. In addition, our EBITDA margin decreased from 36.36% to 35.19% in the third quarter as compared to the same period in 2013. Please refer to Slide 12 for an update on our business segment revenue.

For the third quarter of 2014, the year-over-year decline in the total revenue was driven by the decrease in fixed and mobile voice revenue and handset sales, which offset the increase in mobile value-added service revenue and ICT project revenue. Moving onto Slide 13.

Our third quarter operating costs and expenses increased by 1.9% year-over-year, mainly due to the higher early retirement compensation and increasing depreciation and amortization expenses, which were partially offset by a lower cost of handsets sold and the interconnection fee.

To be more specific, the increase in depreciation expenses was mainly from the 4G construction, 3G maintenance and cloud IDC equipment investment, while amortization expense was mainly from the amortization of the 4G license fee.

On Slide 14, in the third quarter of 2014, cash flow from operating activities increased by NT$1.05 billion, compared to the same period of 2013. Cash and cash equivalents at the end of the period decreased year-over-year, mainly due to the NT$39.1 billion payment for acquiring the Mobile Broadband License in the fourth quarter of 2013.

As of September 30, 2014, we had NT$1.1 billion of cash and cash equivalents. The decrease in EBITDA margin was primarily due to the 4G promotion and the higher personnel expenses in the third quarter of 2014. Slide 15 shows our 2014 third quarter and the first nine months results, as compared to our guidance.

In the third quarter, our revenue was lower than expected, mainly due to lower handset sales.

Operating costs and the expenses were also lower than our expectations, mainly due to the lower cost of handset sold, which offsets the increase in costs and expenses from the following two factors; the higher early retirement compensation owing to more employees than expected that took the program and the higher depreciation and amortization expenses attributed to the ahead of the schedule 4G service launch.

As a result, our operating income, net income and EBITDA are all lower than our third quarter guidance. For the first nine months, although revenue and operating costs and expenses are lower than expected, our operating income, net income and EBITDA for the first nine months exceeded our guidance.

We expect our full-year net income will slightly outperform our forecast. And here is the last page, Slide 16. We expect to see more than a 10% reduction in the budgeted CapEx this year. We continue to allocate our CapEx expenditure primarily toward 4G network deployment and fiber broadband construction.

Precision construction based on big data analysis is the key to ensure the optimal CapEx spending. The fiber broadband investment will emphasize FTTH construction rather than network coverage enhancement. We will also continue to leverage our scale by focusing on the procurement process. Thank you very much for your attention.

And now we would like to open up you’re your questions..

Thank you all for joining the call. Thank you..

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. (Operator Instructions) Our first question comes from Danny Chu, Macquarie. Please ask your question..

Thank you management for the presentation. Just three quick questions. The first question is, in your presentation you mentioned that we should expect about 10% CapEx savings for 2014.

So going forward, so we assume heading into 2015 that this year 2014, is the peak of the CapEx cycle and then 2015 CapEx would be lower than this year? That will be my first question.

Second question is, can management share its reinforcement, like I mean the possibility of introducing tiered pricing in for 4G after the expiration of the promotion going on for this month? And the third question is, I recall that management previously set a target of about gaining 40% market share for the 4G business, and right now, company did an excellent job in terms of getting 35%.

So going forward from current 35%, heading towards 40%, what’s the specific strategy or actions that company is going to take in order to expand the market share from 35% to 40%? Would it be spending more CapEx, or would it be spending more on subsidy promotion, etcetera? Thank you..

Thank you for your question. I will answer the first one, and our General Manager will just reply your next two questions. The first one, about the 10% CapEx reduction. I think we are still working on the year 2015 CapEx, and we believe the year 2015 will be lower than this year’s number.

So that is so far, and I think we will release the year 2000 [ph] CapEx guidance in the next conference call..

Regarding the tiered pricing, we always believe the tiered pricing is the right for fair usage 4G services. However, we will also take into consideration the market sentiment and the competition landscape to make the final decision.

Regarding the 40% market share, as I mentioned earlier, according to an NCC press release announcement last week, the total 4G subscriber on October 15 reached 1.65 million. We believe that our 4G market share has already exceeded 35% and we are in the leading position.

Over past quarters, we were working aggressively within the company and with our partner to enable and foresee to the 4G promotion. This proved to be effective as we are gaining market share months-over-months. Thus we still maintain the year-end 40% 4G market share.

So we will stress on the – keep the momentum so far today in the daily increase more than 10,000, so we think if we can keep the momentum we can reach our 40% target. Thank you..

So if I may ask a follow-up question with regards to that, introducing the tiered pricing.

So basically we should assume that Chunghwa will wait for its competitors to first introduce tiered pricing before Chunghwa will follow, or Chunghwa will take the market leader position in terms of introducing tiered pricing?.

I think the competition is very keen. So we still make – still waiting for our final decision. We will announce the date that we will introduce the new tariff plan. So we still need to consider the market sentiment and the competition landscape. Thank you..

Okay, thank you..

Your next question is from Steven Liu, Standard Chartered. Go ahead please..

Thank you. I have three questions. The first is on the local fixed line business. Can I ask first, what percent of your revenue in voice – in your local fixed line revenue, what percentage is from voice business? That’s the first question. Second is on the broadband business.

It looks that quarterly revenues still just flattish, but we have seen very strong adoption in your, like migration to fiber-to-the-home package. So when would you expect the revenue to pick-up and growth in the broadband business? And thirdly is on the data usage. Can you share with me the smartphone data usage, what is the 4G data usage? Thank you..

25% of the revenue is voice from fixed line business..

Overall fixed line or just local?.

Yes, overall fixed line..

Okay, thank you. Okay, great..

Steven, I think you have to get back to Slide 12. We have segment revenue slide. You can do the calculation, because in under domestic fixed, we have local, DLD and others are voice in revenue, and broadband access that’s for broadband access, and the MOD that’s our IPTV revenue.

You can do some calculation and get the percentage, okay?.

Yes. If I understand in your low cost TSM business [ph], so think this number was shared in local I think..

So for the data usage of 4G, the average data per month is 7 to 8 gigabytes, almost double compared with 3G. For the broadband, the revenue is almost straight [ph]. So we are trying to increase the broadband subscriber. So mostly we can expect to increase smoothly..

Okay, thank you..

Next question is from Chate Bend, Credit Suisse. Go ahead please..

Thank you very much for the opportunity to ask the questions. I have four questions in total. First one is a follow-up regarding the 4G subscribers. Would you be able to be share with us, how many billed 4G subscribers you already have right now, roughly? The second one is regarding the decisions for the promotions.

I understand that you use – you have yet to make the final decisions whether to change or to continue with the existing promos.

When you comment about the market competitions, are you also taking into account your target to achieve the 40% market share by year-end as well, or you think that with your current promotions or even if you introduce tiered pricing, that should still be achieved just from the momentum that you have alone, just want to understand what is the key determinant of the decisions on the promotion side? The third question is regarding the 4G ARPU uplift.

You mentioned during the call the presentation that when you calculate the 4G ARPU, there is an uplift compared to what you get out of the mobile internet subscriber.

Can you share with us roughly what kind of uplift that you are seeing there? And the fourth question is regarding your initiative to do bundling of, between your fixed line, your broadband, your TV and also mobile business.

What kind of bundling that we should expect to see? Are we looking to actually like see some discount if you subscribe to multiple products, or are we looking at more kind of just cross in term of the contents from the IPTV to be viewed on the mobile? What do you think about concept of bundling? Thank you..

So according NCC, they already announced the number on the end of last month. So we will keep the subscriber not disclosed at this moment, but we calculate – we already reached more than 35% of our market share. So regarding the 4G percent in the market share, we see the competition from our competitors is very keen.

So we have 35 megahertz bandwidth and now with our next month [indiscernible] spectrum of 50 megahertz. We can reach more than 100 megabit-per-second downlink and 30 megabit-per-second for uplink. So we would emphasize that our competitors, we are strong point for the competition.

Regarding the 4G ARPU, because currently we didn’t introduce the tiered pricing, so the ARPU is not significant difference for the same subscriber. So we would like to introduce the new tariff plans and we can have ARPU lift in the future. For the bundled fixed line broadband TV, we already have discount for the bundled service.

It’s already been approved by NCC..

All right, thank you very much. Just a follow-up regarding the comments on the competition from your competitors, right. If it’s purely on the price or are we talking about other aspects of the competition as well, that you feel that your competitors are quite strong and you might want to kind of improve on, apart from price? Thank you..

I think it’s not only on the price, okay, and I think mentioned earlier that we have to cooperation with our partners and we also have good channel execution. I think that’s the major two reasons for us to compete. Of course you know, talking about the population coverage about the network, I think that’s another major achievement.

So I think this is probably what we are looking at, not only the price..

Okay, thank you very much..

Next question is from Tina Hou, Goldman Sachs. Please ask your question..

Hi, good afternoon. Thanks for the opportunity. First of all, just a follow-up question on management’s answer to Danny’s question before. You mentioned a daily increase of more than 10,000. Just want to clarify that. Does that mean that we’re kind of gaining daily 10,000 4G subscribers.

Is that what you meant?.

Yes. We have a very good momentum on the increase of the 4G subscriber. The average increase per day is 10,000..

Okay.

And going forward, do you see that rate being steady or slowly coming down, or in other words, am I correct to expect that on the monthly basis, the 4G net-adds will be around 300,000?.

Currently it still increased. The trend is increased today. So we will see the competition, because it really depends on the new tariff, the tiered pricing plan. We will watch how to keep the momentum..

Okay, thanks. And then I have three other questions, if you could bear with me. First one is that I see that, the operating cost excluding the 7% growth in depreciation, operating cost is still flat despite handset revenues been declining by 13.5% year-over-year.

So I am just wondering what’s driving – what’s the reason for COGS being flat while our handset revenue declining by more than 10%? And then the second question is that, your EBITDA margin on service revenue are actually improved in September versus August. Well, this is contrary to the trends we are seeing at your peers.

So just wondering what has made the difference and also where can we see the impact of the iPhone sets as it was introduced in September. And then the third question is also on your new promotions. What would prevent you from taking away the unlimited plans or lower your 4G pricing in your future promotions? Thank you..

For your second question, is the COGS being flat, I think for the first nine months of this year, the reason for us keeping flat is, first one, is we adopt the precision construction in CapEx. The second one is still in the connection fee reduction is according to NCC, I mean regulations.

So I think – and also for major handset sales for the first nine months compared with the same period last year, is also has a big decrease. So that totaled together makes the cost of goods sold being flat. And the other one, EBITDA margin, and you’re asking about when we can see the impact of iPhone 6.

I think the major iPhone 6 sales occurs – happens mainly in the fourth quarter. So I think in the last quarter of this year, we will see the cost increase for the iPhone sales – associated with iPhone 6 sales. And for the new promotions....

Yes, we believe the tiered pricing is the right way for use of 4G services, but at this moment, I think that our customer may not easy to accept the new plan, so we will carefully design the new promotion plan to have a balance between the customer acceptance and the revenue growth. Thank you..

Okay. Thank you very much..

Next question is from Sachin Gupta, Nomura. Please ask your questions..

Thank you. This is Sachin Gupta from Nomura. Just a few things. You were talking about this 40% target for ‘14.

Just wondering do you have any expectations for ‘15 as well? Do you expect that market share to be in 2015? And secondly, between this market share aspiration and ARPU uplift, which one is more of a priority in the near-term and the medium-term. And lastly, just a general question.

If your network is so good in terms of spectrum, is there a method you need to move to this tiered pricing plan anyway? I mean is there another mechanism that you can actually look to adjust pricing up and still get the ARPU uplift? Thanks..

So far the 40% market share is our target by the end of this year. Now we have more than 35%. We are very confident that we have a target by end of this year that we will reach 40%, but for next year we need to watch the competition because of the new player will go into the market that we really need to carefully watch..

Okay.

And how do you balance between the ARPU increase targets and the market share targets?.

I think in the current status, the competition is very intensive, so market share – especially to have a significant market share at this moment, I think it’s the priority, but however in the meantime we want to raise the ARPU after we can certain level subscribers.

So I would say the market share is important, very important, but ARPU will be next priority, and then we will see that going to happen when we present the next tariff program..

And third question?.

So I think the pricing is very difficult to increase. So we will have the applications, value-added services to increase the application to increase the revenue. So we think the tariff now cannot be increased in the near future. Thank you..

Okay, thanks..

We are now in question-and-answer session. (Operator Instructions) The next question is from Alen Lin, BNP Paribas Taipei. Mr. Lin, you’re on the line now. You may ask your questions..

Hi, good afternoon. Yes, thanks for taking the question. I have two questions here. First one, I want to go back to the bundling question of fixed line, TV and broadband services.

Can you disclose what proportion of your subscribers are currently in some kind of bundling package, and also what your target is for the next 12 to 24 months? The second question is on the CapEx and network build-up.

Based on your current plan this year and also next year, will this be the plan for partnership coverage through this year and also through next year? Thanks..

For the network deployment, we will have the coverage of 90% by the end of this year, and 99% by the end of next year. We will incorporate the 900 megahertz spectrum and 1800 to integrate, to carrier obligations, so we can deploy this 900 megahertz to cover the rural areas. So, I think the coverage will be much, much better by the end of this year.

Thank you..

Alen, I mean regarding the bundled package percentage, I think since regulation-wise we are not allowed to bundle our service, but only for promotional program. So right now I think we are not really – cannot really disclose any of those percentages, sorry..

Got it. Thank you..

Regarding your CapEx, okay. You can check our slide 16. I think the total of 4G and mobile-related CapEx this year, I think we still have a number close to NT$9.3 million..

And the target for population….

Yes, so do you think….

I’m sorry, and the target for population coverage, I think we mentioned earlier that for 2014, we expect to reach 90% of population coverage. By next year, year-end, we are looking at 99%..

Got it. Thanks..

(Operator Instructions) If there are no further questions, I would turn it back over to President Shih for closing remarks. Go ahead please..

Okay, thank you all for joining the call. Thank you very much..

Thank you, President Shih. Thank you for your participation in Chunghwa Telecom’s conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw/ir under the IR Calendar section. You may now disconnect. Goodbye..