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

Danny Chu - Macquarie Securities Jinjin Wang - UBS Richard Chan - AIA Taiwan Varun Ahuja - Credit Suisse Jack Hsu - Sinopac Securities Livia Wu - Genta.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company’s Second Quarter 2016 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’d like to turn it over to Ms. Fu-fu Shen, the Director of Investor Relations. Ms.

Shen, please go ahead..

Thank you. This is Fu-fu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our second quarter 2016 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 financial highlights, then we will move on to the Q&A session. On slide number two, please note our Safe Harbor statement. Now, I would like to turn the call over to President, Shih..

Thank you, Fu-fu. Hello everyone. This is Mu-Piao Shih. Thank you for joining our second quarter 2016 earnings conference call. As you can see from slide four, our 4G subscriber number continues its strong grow trajectory. By the end of the second quarter of 2016, we had accumulated 5.7 million 4G subscribers.

As earlier promised, we took our first step on April 1st to move towards a tiered-pricing environment by launching our Big 4G plans, raising the bar for unlimited data usage and catering to the strong demands from customers across the board. As you are aware, we have experienced some subscriber loss over the past several quarters.

The key reasons for these losses are due to the SIM consolidation as well as the fierce market competition in the low-tiered sector. Following the launch of the Big 4G plans, we are focusing more on channel marketing by enhancing channel incentive program as well as upselling renewed contracts to retain customers and increase their contribution.

We started to see up selling recently, which is positive for the future mobile service revenue growth. Turning to our broadband business, we have continued to vigorously defend this business as heavy market competition and 4G substitution hindered subscriber and ARPU growth.

We will continue to leverage our marketing analytics for precision marketing, and offer convergence services by bundling MOD, Wi-Fi and OTT services to enhance our competitiveness, product strength and defend our market share.

Additionally, the Chunghwa’s Taipei IDC, one of the four highest-rated data centers in the world, has recently been rolled out and into operation. Our vision is to make it the key information hub of the Asia Pacific region.

We believe it will significantly enhance CHT and other enterprises ability to further strengthen their cloud-based business capabilities. Slide five provides an update on our mobile business.

Supported by the continued increase in 4G growth and mobile internet subscribers, mobile internet revenue grew by 6.6% year-over-year in the second quarter of 2016, and served as the major driver of mobile value-added service revenue growth.

In addition to our promotional campaigns mentioned earlier to strengthen subscriber acquiring and retention initiatives, we are also promoting Hami VAS to increase customers’ contribution. Slide six shows the results for our broadband business.

During the second quarter, we continued to see a migration of the subscribers to higher-speed fiber services. The number of subscribers signing up for connection speeds of 100Mbps or higher grew by 13.8% year-over-year to 1.12 million.

We will continue to promote and upsell our broadband services and encourage customer migration to higher speeds, which should further improve the user experience and their stickiness on our network. Moving on to slide seven. Our IPTV customers continued to sign up SVOD programs, as household TV usage rates also continued to steadily climb.

Concurrently, our customer base further expanded and we believe these positive developments demonstrate the potential of these content services. To strengthen the competitiveness of our MOD services, we will continue to enrich our content offering, by diversifying and expanding our selection of movies, dramas, and TV series for SVOD.

We will leverage the Brazil Olympic Games to be held in August, and are currently preselling the games viewership spread which have already begun to attract MOD subscribers and increase SVOD subscriptions. Additionally, we will broadcast related games and programs across all of our three platforms for fans to closely follow.

At the same time, we are continuing to enhance the MOD user interface, and leverage our large broadband and 4G subscriber base to promote MOD and OTT services, further propelling the overall business’ growth. Please see slide eight for an update on our ICT initiatives.

As you can see from the solid growth we have experienced with our ICT businesses, we aim to continue leveraging our competitive advantages with regards to network infrastructure, IDC, and CDN, to offer reliable, customized and comprehensive ICT solutions to enterprise customers.

Additionally, we recently launched the highest-rated cloud IDC combining advantages of possessing direct access to submarine cables and high-speed broadband networks, to further explore business opportunities in finance and ICT/OTT industries. 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 10. Slide 10 contains our income statement highlights. For the second quarter of 2016, total revenues decreased by 1.3% and operating costs and expenses decreased by 0.9% year over year.

Our income from operations decreased by 2.4% and our net income decreased by 0.7%. In addition, our EBITDA margin slightly decreased to 37.35% in the second quarter, from 37.94% the same period of 2015. Please refer to slide 11 for an update on our business segment revenue.

The decrease in total revenues was driven by the expected decrease in fixed and mobile voice revenue and sales of smart devices, which was partially offset by the growth in mobile value-added service revenue and ICT project revenue.

Moving on to slide 12, our second quarter 2016 operating costs and expenses decreased by 0.9% year-over-year, mainly due to the lower cost of goods sold and depreciation expenses.

On slide 13, cash flow from operating activities for the second quarter of 2016 decreased by NT$4.7 billion, or 26%, compared to the same period of 2015 mainly due to higher tax payout and increased ICT project revenues. As of June 30, 2016, we had NT$44.6 billion of cash and cash equivalents.

Larger ICT project revenues also slightly brought down the overall EBITDA margin in the second quarter of 2016 on a Y-o-Y basis. Slide 14 shows our second quarter 2016 operating results compared to our guidance. In the second quarter of 2016, operating income, net income and EPS all outperformed our guidance.

The lower operating costs and expenses were mainly due to the lower than expected depreciation expenses and cost of goods sold. Looking at our performance thus far in 2016, we believe our business operations and developments are on track, and we are confident that we will reach our full year guidance. Lastly, on slide 15.

We are budgeting CapEx of NT$30.6 billion for 2016, which includes the deferred projects from 2015 such as cloud data center and marine cable construction. Going forward, we will focus on investment for our core businesses, including 4G, FTTx and IDC among others under the precision construction principle. Thank you for your attention.

And we would now like to open up for questions..

Thank you. We will now begin our question-and-answer session. [Operator Instructions]. Our first question is coming from Danny Chu, Macquarie Securities. Go ahead please..

Hi, management. Thank you for the presentation. Just two quick questions. The first is on, with regards to the introduction of the tier pricing.

Can you talk a little bit about like I mean since the launch of the new plans by the Company, roughly how many customers has taken the new tariff plans? And the second question is you just mentioned earlier that one of the reason why the net income is coming ahead of your current budget is depreciation expense is lower than expected.

Can you elaborate a little bit on what particular items depreciation expense is lower than your expectation? Is it related to because some 4G equipments are not being deployed according to schedule or kind of what other special reasons behind the depreciation expense lower than your original expectations? Thank you..

In response to your question two, I mean regarding why our EPS is ahead of the forecast, actually there are two major reasons. The first one is less [indiscernible] devices were sold in the first half.

And the second one is depreciation, because -- if you see, we just already present you, our CapEx expenditures and in the first half we only have 6.8 billion and then the remaining mostly will be spent in the second half this year. So that’s also a reason the depreciation cost was below our original expectation..

Danny, regarding the first question about the launch of the new plan, how many customers took the plan, I think since we already cancelled the original plan which we launched back in September 2014, so basically currently most of the customers for 4G, the new subscription, is on the Big 4G plan..

So, if I may clarify, so basically for all the -- according to your explanation just mentioned, so basically all the new 4G customers that you have add on since the launch of the plans, they are subscribing to the new tariff plans, am I correct?.

Yes, you’re correct..

Thank you. The next question is from Jinjin Wang, UBS. Go ahead please..

Hi. Thank you for opportunity to ask question. I have three questions. One is I noticed your churn rate has been very low….

Excuse me Jinjin, could you approach the microphone?.

Okay.

Is that better? Is this better?.

It’s better..

Okay. Sorry about that. My first question is regarding the churn rate. It seems like your churn rate has been declining and what’s been the sort of the underlying drivers for the lower churn rate? Secondly is management mentioned that ICT has been a driver to the incremental growth.

I’m just wondering what is the roughly the ICT revenue as a percentage of total revenue and what is growth rate year-over-year? And the third question is a follow-up question on the depreciation.

Can you also give us some color regarding, for the full year your D&A, depreciation plus amortization cost, what’s going to be the trend compared with last year?.

Jinjin, for your question about the churn rate decline, yes, we do have churn rate decline in the recent months. I think we mentioned earlier about what kind of countermeasure we took for to defend our market share and to acquire customer, retain customer. Then, we are focusing more on the channel marketing.

We enhanced the channel incentive program and we also try to make the channel people to upsell, renew contracts to retain customers and increase their contribution. I think that’s the main reason for the churn decline..

In response to your question two, the ICT -- give me a rough number about ICT accounts for the total revenue in last year between is 4% to 5%, and this year we project will be around 6% to 8%. So, this will be growing fast.

As to your question three, depreciation and amortization cost trend, I will say that depreciation declined a bit but amortization due to Big 4 and 4G license, amortization that will be increased a bit. So in total that will remain right..

Thank you. The next question is from Richard Chan, AIA Taiwan. Go ahead please..

Thanks for taking my questions. I have three questions. My first question is, could you talk about what your 4G user target is in terms of market share and total usage at the end of this year and probably for the next year? We would like to know your longer term strategy between the market share and the pricing.

And my second question is the ARPU in this year seems -- is a little bit slow now compared to last year.

Could you share the reason? And what kind of overall ARPU improvement should we expect and what’s your strategy to improve or maintain current ARPU level? And the third, my last question is could you share maybe the potential risk on the overall telecom industry? We know the -- it seems the market has become more positive, the price is healthier and the major players is still dominant in the market.

But still, could you share some potential risks that you guys and we investors should bear in mind?.

Okay, in response to your question one, I would say that this year, our target is to add new 4G customer around 2 million, but will strive do better. So, the 4G user market share I think we presented a number to you, it’s 37.5%. And regarding your question two, the ARPU this year is lower than last year, the reason is very simple.

I think the 4G penetration rate now is over the 50%, so the higher tier, mid-tier customer already, I mean in revenue, so for remaining most of them will be shifted from 2G or 3G and most of them will be lower tier customers.

So that is the reason we project our ARPU this year will be flat and probably a bit increased due to the, if we sell more value added services..

Regarding the third question, the risk on telecom industry, I think currently people probably already know that the overall -- the mobile market is saturated. So, I think the market competition is getting fierce. I think that’s the really concern for this industry..

The next question is coming from Varun Ahuja, Credit Suisse. Go ahead please..

First thing I want to ask you guys on the service revenue growth cellular mobile, it has declined on a Y-o-Y basis. So, I wanted to check your views.

What do you think over the next two to three years, how should we look at this important metric service revenue growth? Can you elaborate more on the take-up of 1399 plans which you have launched recently for the unlimited? Your competitor mentioned that the take-up for them is pretty good.

So, I just wanted to hear your views, how are you seeing the uptake for this 1399 plan going forward. And also if you can comment on how do you see the 4G renewal, which is going to happen from second half of 2016.

Will customers move to the 1399 plan that you’re expecting or there is still 999 plan or 1199 plan where the data allowance that you’re offering is still generous 15 GB to 25 GB? Second, I want to hear your thoughts on EBITDA.

Given that this quarter or this first half compared to last year expected to have lower handset subsidy because iPhone 6S hasn’t been that successful. So, the expectation was that EBITDA should show some improvement Y-o-Y, but for you the EBITDA has declined.

I just wanted to hear what is happening on EBITDA? Why is on a Y-o-Y basis EBITDA is declining given handset subsidies have come off? And if you can elaborate what happened in May -- sorry, in June month particularly, because EBITDA on a monthly basis declined by 8% on that month, so if you can help on that front? Lastly, just on CapEx, you are currently running around 25% -- 22% of your full year guidance.

So, do you expect significant increase in CapEx in second half?.

In response to your question one, I mean service revenue decline, I think in the beginning we already mentioned that we have experienced subscriber loss. I mean, the reason is that for SIM card consolidation and also the very intense market competition on the lower tier sector. Sorry. I’d just repeat again.

I think we have -- in the beginning we have mentioned that we experienced subscriber loss. The reasons for our loss are the SIM card consolidation and also, we faced the very intense market competition on the low tier sector. So that you will see that overall the customer number declined a bit and the ARPU spread.

So the sales revenue, I mean a bit declined. But, however, if you see our service revenue market share, we do increase from 36.9% in the same period last year to 37.2%. So, also we took over the first step, I mean the new tariff plan on April 1st.

And I think, this plan is very good right move to fair usage and also to give the different package to different need customers. However, I think that for such kind of big change, it always takes some time to wait to see the meaningful impact, financial impact.

So before we see that impact, I know we believe in the second half we will see the positive results. We have enhanced a few activities. First of all, we are now very focusing on the channel marketing by enhancing all the channel incentive program and upselling renewed contract to retain the customers, and also increase their contribution.

And secondly, I think that most importantly, we need to accelerate our 2.6 giga construction and also to improve our telecommunication service quality to provide the best quality of experience to customers.

Thirdly, in order to compete with the smaller players, in July we also offer, the comparative package to allow the low tier 3G customer to move to the 4G program. Okay. And then regarding the 4G renewal, your question two, will the customer move to the 1399 or 999? I think that is the different package.

The higher -- the 1399 is with a higher handset subsidy and also unlimited program. That makes a difference with the 999. So that it depends on the customer, will they need the higher handset subsidy or they just -- they don’t care about, or they don’t care about a handset subsidy, they just want unlimited program.

And the EBITDA is, we just mentioned in the beginning also -- now in the second quarter, we have larger ICT revenue on books. Although we have saving on the handset subsidy, but ICT revenue, their margins averagely speaking is lower than telecommunications. So that’s the reason you will see our EBITDA margin a bit decline.

Regarding your last question, the CapEx. I think for the remaining months this year, there will be a few big projects like the marine cable construction and also as we mentioned, ICT, the world class, the highest rate IDC in which we will have a great opening tomorrow. So, these few big projects will just happen in the second half this year.

Okay, that’s it..

Thanks. Just a follow-up on EBITDA. I was talking on absolute term. If you look at EBITDA on absolute term has fallen.

If you had a good ICT revenue in second quarter, on absolute EBITDA, shouldn’t we expect some growth because if you have a good ICT revenue and if even if the margins are lower at least, which on a Y-o-Y basis should show some growth?.

Ahuja, because you’re talking about exclusively the first half, actually our EBITDA amount, absolute amount is increased. For the….

Even second quarter, if you look at it….

Decreased a little bit here because I think the revenue side, it’s declined for 1.3%. And we also have operating cost expenses, even though operating expenses declined but the number doesn’t really, and also you know the DA, I think in the first, in this quarter I think the D&A expense, the amount is much less compared to last year.

I think that’s another reason for that..

Thank you. The next question is from Jack Hsu, Sinopac Securities. Go ahead please..

Thanks for the chance to have question, I have two questions. First about IDC business where we cooperate some international IT customers in IDC. This is the first question.

And my second question whether we have any plan -- any new plan to promote to customers and the will to increase our 4G customers, 4G subscribers?.

Let me repeat your question one.

Are you mentioning about the IDC where we cooperate with international IT customers?.

Yes..

IDC not, ITC, okay IT. Yes we have few deals with international is being negotiated, so cannot tell you more about that. And for the new plan, I think our current tariff plan, we keep stable. I mean, because as we mentioned, there is a big move in the recognition, we should be patient to take some time to see the results.

However, I can’t guarantee you 100% because it still depends on market competition landscaping..

Thank you. The next question is from Livia Wu, Genta. Go ahead please..

I have three questions. One is also about IDC [indiscernible]. Do you have any expectation if the IDC reached its full capacity, how much revenue or profit can the new IDC contribute to our total revenue or profit? This is my first question. And the second I want to talk about the new data -- 4G data plans from April.

Do you have any number for -- of the total of subscriber acquisition? What’s the percentage of the plans over NT$1,000? And also how much, what’s the percentage of the plans over NT$1,400? That is my second question.

And the third one is about our broadband business, because we notice that our total broadband revenue started to decline Y-o-Y since first quarter this year.

Do we think that because our ARPU also declined Q-o-Q in the second quarter, do we think that this trend will continue or do you have any strategy to counter to the pricing competition from MF [ph] or new entrants?.

For IDC [indiscernible]. Sorry, I cannot give you the forecast. But, however, I can tell you -- I mean the result will be I mean comprehensive because IDC franchise, it function carries many applications and the many services like the cloud computing and big data and IoT, service as a foundation for these applications.

So, we will see that result, positive result next year. And regarding in response to your question three, I think as I just mentioned, we are now very focusing more on the channel marketing. We try to up sell and we already see some positive result in June and July. So, we hope, I mean, these good response and result will continue..

About your question number two, our Big 4G plan launched on April 1st. Total customer number acquired, it’s more than 0.5 million.

As for the percentage for 100 or above 1399, I think as we mentioned earlier, we think in the very beginning, it takes some while -- so in the very first beginning, it’s not proved to be -- not that substantial, but recently we see more upsell, averaging number we see upsell kind of the number. So we think it’s positive direction.

So, we like to see for several -- for IDC how it goes in the next several months. But the direction is quite positive..

Thank you. The next question is from Jinjin Wang, UBS. Go ahead please..

Thank you. If I may I have two more follow-up questions.

Hello?.

Jinjin, please again approach your microphone, sorry to say..

Sorry, I’m using a new headset and so I have some problem. The first question regarding your subscriber acquisition costs per subscriber.

In the first half, according to my own calculation, since IPO subscriber acquisition cost per subscriber declined 5% to 10% year-over-year, I just want to say that sort of roughly 9%.And secondly, regarding the upcoming spectrum auction in 2017, I know now it’s too early maybe to talk about the details, but can you just share some of the color in terms of just your personal judgment, would you expect this auction to be overly competitive or more or less rational?.

Regarding the spectrum auction next year, I think the 2100 is very important for the 3G voice. And we believe the 3G voice also will continue for a while. So, we’re, internally we’re working on a plan. And so far, the game of rules still needs the regulator to formally announce. So that is the current status. .

For your number one question, I think the subscriber acquisition cost, of course, this year because of the iPhone 6S, it’s not really as popular as iPhone 6. So, the overall handset subsidy per handset, because still iPhone accounted for quite a handset number of our customer share.

So it’s -- I think the main reason for that is the handset is not that popular this year compared with last year. So, the overall subsidy, average subsidy has actually declined. But, I’m sorry, I cannot share with you what the percentage is..

Just one follow-up question.

So, is that fair to say iPhone accounts around 15% to 20% customers?.

I didn’t really mention about the share, the percentage, but it’s still quite a number, okay. And of course, this year, I think the first half compared with the same period last year, even the Android phone, it’s more toward mid to low tier handsets. I think that’s another reason for that..

Thank you. [Operator Instructions]. If there are no further questions, I will turn it back to over to President Shih..

Thank you for joining in our conference call. Thank you very much..

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