Fu-fu Shen - Director, IR Mu-Piao Shih - President Bo Yung Chen - Chairman & CEO.

Neale Anderson - HSBC Patrick Chan - Nomura Varun Ahuja - Credit Suisse Peter Milliken - Deutsche Bank Livia Wu - Genta Jack Hsu - Sinopac Securities.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's Fourth 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 Fourth Quarter 2016 Results conference call. Joining me on the call today are Mr. Shih, Chunghwa Telecom's President and Mr. Chen, our CFO.

During today's call, management will first discuss the overview in the quarter, followed by operational and the financial highlights, then we will move on to the Q&A session. On slide number two, please note our Safe Harbor statement. Before I turn the call over to President Shih, I would like to make a brief introduction. Mr.

Shih has served in many different management position within Chunghwa Telecom over the past years and is extremely familiar with our broad and comprehensive telecom platform. Before taking this position as the president of Chunghwa, he was a Senior EVP, supervising marketing, information security and the customer service.

He was also responsible for the establishment of our big data office and the cyber security department. Now I would like to hand the call over to President, Shih..

Thank you, Fu-fu, and good afternoon, everyone. Welcome to our Fourth Quarter '16 Earnings Conference Call. For beginning, let me first start out by saying that it is an honor to be promoted to president for this company, which I have spent most of my career helping build.

In this new role, let me share with you the mission and operational strategies for Chunghwa Telecom's long-term development, which I have co-developed with Mr. Yung Chen, who was appointed as the company's new Chairman and CEO.

First of all, we will focus on further cross-selling our high quality and a diversified services to our business and the retail customers, while at the same time, also reviewing the efficiency and the effectiveness of our market activities to further streamline it and to strengthen profitability.

Secondary, to stay in front of and capitalize on our industry chain, we will leverage our integrated networks and service platforms to promote digital convergent services and develop new opportunities in innovative business line including ICT, IoT and OTT and so on.

Third, reference to the government's new cellphone development policy, we will explore opportunities to strengthen our corporation with companies in Southeast Asia countries and extend our geographic footprint.

Fourth, we will internally broaden our corporate governor initiatives to ensure that Chunghwa will continue to be a leading model in fulfilling its corporate social responsibility. Finally, we will continue to drive investments into talent, network construction and taken out R&D to maintain our long-term competitiveness.

Now, let's take a look at our business overview. For our mobile business, even though we are the market leader in Taiwan, we did experience some customer turn over during the fourth quarter. Even with the fierce competition in this business, we are able to slow customer loss as compared to the previous quarters.

We continue to retain our market-leading position in mobile subscriber and mobile revenue. This was primarily attributable to our entire team's effectively streamlined marketing efforts. Going forward, we will continue to streamline our marketing activities and then to further strengthen our customer loyalty in the retention.

For our broadband business, the intense competition from cable operators resulted in some customer loss for '16. However, due to our precision marketing in the improved broadband offerings, the loss was mitigated as compared to '15.

Going forward, we will continue to leverage our big data analysis capability and to promote diversified digital convergence services to defend our market share. Now, I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business.

Due to market competition and sim card consolidation, our total mobile subscribers decreased by 3.5% year-over-year to 10.8 million. However, subscriber count stabilized in the fourth quarter, primarily due to improved customer targeting and increased marketing.

To cater to our customer's demand and to continue to move effectively with other players in market, we launched new promotional plan at the beginning of this year. Targeting both mid-to-low and mid-to-high tier customers separately.

With the new plan, we further raised the bar for unlimited data usages as we aim to continue shepherding the market towards tier-pricing structure.

Going forward, it will continue to weigh the risks and the rewards of the protesting [ph] our pricing strategy, but we will remain consistent in strengthening our subscriber acquisition and the retention initiatives to further solidify our market share.

Meanwhile, we will increase our overall revenues by encouraging customers to subscribe to single sim card for usage in which whereabout devices and IoT applications, as well as further growing our enterprise customer revenues. Slide 6 shows the performance of our broadband business.

During the fourth quarter of '15, we continue to see a migration of subscribers through highest bid fiber services. Further, the number of users signing up for connections bid of 100 megabit per second or higher grew by 11.1% year-over-year to $1.70 million.

We are pleased with the results we are seeing and we will continue to promote and upsell our broadband services and encourage the customer migration to highest bid services. We believe we are taking the right steps to further improve user experience and the user stickiness [ph] of our network.

Moving on to Slide 7; average adjustment of our corporation agreement with channel providers from the third quarter of '15. Our ICT revenue stabilized in the third quarter of '16. For the fourth quarter of '16, ICT revenues increased by 5.3% year-over-year, primarily driven by the healthy growth of IPTV and SVOD subscribers.

More technically [ph], by the end of '16 we accumulated 780,000 SVOD subscribers which exceeded our original target. Additionally, household TV usage rate also increased to 72.2%. Going forward, we will continue to venture [ph] IPTV content and offer upsell package to increase customers' contribution and the total revenues.

Please turn to Slide 8 for an update on our IPTV initiatives. We are delighted to see continued solid growth in our IPTV business in '16 and it came to continue to leverage our competitive advantage in network infrastructure, IDC and CDN to offer reliable customized and comprehensive ICT solutions to our enterprise customers.

Additionally, by leveraging our cloud, big data and information security capabilities, we established an IoT platform that developers growing energies, smart building, video surveillance and encouraging transportation solutions for enterprises to facilitate there business development.

By leveraging our network in the cloud resources, enterprises from different industries can also develop their own solutions over the platform. Now, I would like to hand over the call to Mr. Chen for our financial results..

Thank you, President Shih. Now, I will go through our financial result in details beginning on Slide 10. Slide 10 provides you with highlights from our income statement. For the fourth quarter of 2016, total revenues decreased by 6.2% and our operating cost expenses decreased by 5.7% year-over-year.

Our income from operations decreased by 12.7% and our net income decreased by 18.3%. In addition, our EBITDA margin decreased to the 30.9% in the fourth quarter of 2016 as compared to 31.5% in the same period of '15. Please refer to Slide 11 for revenue breakdown by business segment.

The decline in total revenue for first quarter of 2016 was driven by decrease in voice revenue, smart devices, sales and ICT project revenue which was partially offset by the increase in mobile, value added service revenue and applications revenue and the internet segment.

Moving on to Slide 12; our operating cost and the expenses decreased by 5.7% year-over-year in the fourth quarter of 2016 primarily driven by the lower cost of goods sold, inter-connection expenses and ICT project cost.

On Slide 13, cash flow from operating activities for the fourth quarter of '16 increased by NT$4.6 billion or 15.7% as compared to the same period of 2016, which primarily attributable to the decrease in receivables in the inventory, partially offset by the decrease in payables.

As of December 31, 2016, we had NT$13.1 billion of cash and cash equivalent. Slide 14 shows our operating results as compared to our guidance. We are pleased that our performance in year 2016 including net income and EPS met our full year guidance.

The lower-than-expected operating income in the fourth quarter of 2016 was mainly due to the impairment of 2G equipment and net income was further impacted by the impairment of from t China airline investment. Moving on to Slide 15, which shows our 2017 consolidated guidance.

Moving ahead, total revenue for 2017 is expected to increase by 0.5% to NT$231.2 billion. The increase in revenue is expected to come from expansion of mobile value added service, smart devices sales and the enterprise ICT business.

Operating cost and the expenses for year 2017 are expected to increase by 2.8% to NT$186.46 billion, primarily driven by the growth in our IDC business, mobile internet service, smart device sales and enhancement of digital content. Additionally, expenses for the 4G license will increase year-over-year.

Given these projections, we expect 7.1% worldwide decrease in operating income and 7.8% year-over-year decline in net income. Lastly, moving on to Slide 16, our CapEx spending in year 2016 was NT$23.5 billion, which was much lower than the budget among our NT$30.6 billion.

The difference mainly came from price negotiation with vendors during the procurement. Our internal optimization may be processed and a change in project that has been canceled or deferred to year 2017. For '17 we are budgeting NT$30.3 billion in CapEx, including the deferred items from year 2016.

We will continue to invest in 4G, FTTx our various service platforms, as well as IDC and the cloud business. Thank you for your attention. We will now open up for questions..

Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question is coming from Neale Anderson, HSBC. Go ahead, please..

Hi, good afternoon. My two questions, please. One is on the mobile pricing environment. In your revenue guidance as you said reflects a quite difficult outlook in 2016.

Do you feel that Chunghwa is the largest wireless operator is close to being able to lift prices in 2017? Or is that difficult? My second question relates to the ICP business where we've seen cost go up about 2016 and in the guidance for 2017.

Could you give us a bit more detail on how you expect the margin trend to develop this business this year? Thank you..

The reason we guide down a little bit of our mobile business in for '17 is most because you probably understand already that in '16, we experienced some customer loss and we do forecast in the beginning of this year, we will continue to have some plus for this coming in one to two quarters.

Basically, we are taking some countermeasures, try to retain the customer, try to no swing and no number they would have been lost. We do see this phenomenon happen in fourth quarter last year. We would like to see this good positive thing to continue in this year in the coming quarters.

But find it difficult to really get that to the previous level in this year, but however, talking about the pricing, how can we be able to lift prices in '17? I think we have to know different kind of plans to please different target audience. We also have different kind of commission strategy for a different target audience.

Hopefully this year can work out. This is answer to your first question..

In response to your second question, you see the ICT business cost is rising. I think in general that the revenue is also increasing in double digit. As we all know that the ICT profit margin unlike our traditional telecom business is a bit lower.

But however, with larger economy of scales and also we have a more and more self-developed [ph] product, injected into the project, overall, the profit margin is improving..

Thank you..

Your next question is coming from Patrick Chan, Nomura. Go ahead, please..

Hi, thank you for taking my question. I have two questions. Number one, you mentioned in your operational strategies that you want to leverage on the new government's Southbound Development Policy.

Could you elaborate a bit more on what kind of advantages or benefits that you expect to get from these Southbound policy and how would that translate into the financial contribution. And secondly – I mean first of all, congratulations on your role shift.

Could you share with us how differently would you approach to managing this company differently than the previous management? That's my two questions. Thank you..

About how to take advantage of the government's Southbound development policy. First of all, we would like to explain our cooperation with our partner, Bejo [ph] in Vienna, to further explore opportunity in Southeast Asia. And we will find to establish a subsidiary in Thailand. Currently we have another office are there.

Also, we will focus on Indonesia and Malaysia markets as well. We continue exploring opportunities in Southeast Asia for years. Of course it's important to our long-term development and that has been one of our existing overseas expansion strategies.

In mid to long-term, we expect to offer our ICT, IoT and digital convergence services to this market company..

Okay. May I follow up? It seems that in retail markets in this geographic markets tends to be a bit more competitive than all markets.

Is it fair to assume that your focus will be mainly on the say, ICT or at the corporate segments?.

Okay. We were focused on corporate customers..

Thank you..

About the previous question of on how management company is different to either than our previous management. Their operation started to show on the Slide 4..

Okay..

The operation studies is including streamline services and that strengthen profitability and capitalize every men at the [indiscernible] of digital convergence trend. The third is leveraging government's New Southbound development policy.

The fourth is broaden corporate governance initiatives; and the last final is continue to invest in talent network, construction and R&D..

So for these are the men, areas of focus that you would highlight to the shareholders that you wanted to carry the company forward.

Is that fair to assume?.

Yes, it is..

Okay, thank you. That's very clear. Thank you very much..

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

Thanks for the call. I've got two questions. Firstly, if you look at your financial performance bearing 2015 wherein the earnings improved in double-digit earnings for the company as we never declined for the last four or five years.

And '16 it declined, now in '17 if you look at your guidance, you're going back below what you had in 2013 or below that level also in terms of earnings. So I'm just trying to gauge, the idea you come out with the guidance decline in profitability for the mid-term in profit.

Where do you think are the next three to five years growth is going to come from? I just want to get management views over the long-term. How do you plan to grow this business going forward? Number two, if I heard it correctly, have you raised prices at the start of this year when you said you launched new plans where a new place threshold.

Can you please provide more clarity? What are the new plans? Because I remember 1,399 was the plan that was launched with you offering unlimited data.

So I just want to hear, has there been any change in terms of plans? Thirdly, can you provide much more clarity on the geographic expansion that you're talking about? What kind of amount of investments you are looking at? Is there any amount that you're fixed in terms that you will invest? What is the size physically you're looking at? And if I heard it correctly, you were not going to enter into any of this market, looking at mobile, but it's just the enterprise side of the business.

A little bit clarity on that, that will be helpful.

And lastly, given the free cash flow profile that's improving, dividends, how should we look at dividends? Is the management – given the free cash flows increasing and your net cash balance sheet, is it much more willing to give more than 100% as dividend? Sorry, lastly, one more thing, CapEx, what should be the normal CapEx level given you have six billion of spill overs into 2017? Thank you..

Okay. In response to your cash dividend, I think as we said before, it is still subject to our capital expenditures, status and also approval from the board. But it's likely that our cash dividend policy were similar to what last year.

Regarding your question about the CapEx, we just announced that our guidance is around the NT$30 billion and we also have a breakdown for these investment segments. So I will say that in the future, that next year, probably similar CapEx level and regarding your question about extension, the money or where we are trying to spend.

I think I can tell you that so far, we fully dedicate in the new business such as the IDC, IoT, cloud computing. I think this area, cloud computing. And also, your question about whether we are going to enter mobile business in this market. I believe it's the opposite market.

I think as we just mentioned for the IDC, over shows business and at this moment, we were many focused on corporate enterprises, customers, especially they have some Taiwanese corporate enterprises overseas.

Regarding your question about have we raised the price on our mobile plan, I think our market compared its dynamics; currently it seems a lot on the high comparative entity on the lower end segments. But however, we see good results, high-end segments.

Currently, I think we are following new acquisitions, we have over 50% of the customer that pick up 1,399 program and that we continue to see the good acquisitions. As you say, we were raised, but the price. I believe we are confident about our current status and that we were – if any change is still subject to the market's competition status.

Regarding the first question about the year 2016 performance and '16 where the revenue growth come from. Actually the current status is the voice revenue, continuing to decline and that we do our best to defend our mobile market share and also we want to improve our ARPU and generate more revenue.

So we would enhance our construction, enhance our service quality, but on top of that we will also put more efforts and results in the new business relating in the segments such as IoT. We have some progress in the smart manufacturing industries and also transportation for the IoT-related services and also for information securities.

It has a very good progress in that segment. And also cloud computing and the Big Data, we see many good business opportunity layers, so I can tell you that also contribute a great part of the future or revenue growth. And regarding the ICT, we just say that it's the higher economy of scale.

We see that our profit margin is getting better and that also; we have more of self-developed product injected into the project, so we're confident to see greater success in the future..

Thanks. Just a bit more clarity on the mobile set; when you say the service strategy, you will look at raising the threshold for unlimited plans and move toward tiered-pricing.

What is that in terms of next two to three years do you think the pricing in the sector has moved up, can move up further and what would you have given? Last year we had the 1,399 change. After that, the service revenue has not shown any growth in the financial performance as in being done great.

Additionally, there has been a lot of several other 699 or other plans in the market. As you mentioned, loan has pretty competitive.

So how do you see the mobile as a whole over the next one or two years and given your strategy because you are the market leader and your directions, the other two follow what has been done in the past? So do you think you will continue to [indiscernible] these prices to move toward effective tier pricing, which is obviously your strategy; so how do you plan to follow your steps that you want to take to follow the strategy? Thank you..

We still believe now the tier pricing and the fairly usage is the right move and that lies also the long term directions. However, we also understood that and the current market is there are a demand for unlimited programs. I think the unlimited program, we'll continue to survive, stay for wire.

But however, in a longer trend, the tier pricing is the right move, is the right direction..

Okay, thank you..

Thank you. Our next question is coming from Peter Milliken, Deutsche Bank. Go ahead, please..

Yes, good afternoon and thank you for the call and congratulations on the new role. I just got one question and that is it is mentioned in the reports that you published is the lowest in the industry on mobile, and yet you do have the big outflow of mobile subscribers indicating that your gross ads were quite weak.

Is that because of the competition in the first half of 499 plans, do you think it's something else, but with stopping you from getting gross ads in 2016, thank you..

I think the overall the mobile market is shrinking, we understand that in Thailand market by a costumer, number is shrinking, and we mentioned earlier before we can know that one of the reason it's to see consolidation, the other reason [indiscernible] the whole market price exaggerated, so it is quite competitive at the moment.

And we do observe that Chunghwa in fourth quarter, you probably know the overall performance for mobiles, is not good, but in fourth quarter even though we see which is -- but the overall situation is getting better, and we do hope that the overall situation will go to this direction to more positive ending, in this next one or two quarters.

So currently we are internally we are we allocated, we try to optimize with all the resources into specifically different target audience, we will offer different kind of resource, try to not only get back the positive costumer gain, but also but the bottom line will be an improvement. That's how we looking at this business..

Right, okay, thank you. And just to summarize some of the points on strategy, on the present.

Is it fair to say that Chunghwa telecom is looking to move from what's been probably inefficiency focus, previously; and the last two -- three years, towards more of a growth strategy, by its ICT and IOT and other types of services or the deficiencies going to be a big focus. Thank you..

I think thinking of the efficiency and growth that there two side we are looking at.

Okay, just so we understand current we are experience is the growth revenue losing, which means they could do I think it's not come that, but what I see things we are building up our capabilities for past several years, so we are pretty confident, for ICT also the leading grin in this market, so we are suppose we are tried to even stream a lot more streamlined and in the same time try to make the profitability margin of ICTP business getting better.

So in the east becoming [ph] you can see not only the increase up to revenue for ICT but also you can see more margin come out from this new emerging business. .

Okay. Thank you. .

Thank you. Our next question coming from Jack Hsu from Sinopac Securities. Go ahead please..

Thank for giving the chance to ask question. And I have two questions, first question is will we any further cooperation with some company such as Netflix [indiscernible] providers over the world in the near future.

This is the first question, and my second question is, about our IPT [ph] business, do we -- could you inform so elaborate more detail about the IPT, and IOT what kind of things would be done in the 2017. Thank you. .

Regarding the operation of Netflix or other providers, I would see it's possible to cooperate with all other content. .

. And so for your second question, I think our administration -- presentation that we are building some IOT platform to invite the old industry to developing their application on top of it. Internally we also doing out own job try to a bundle in some product that we can and get more enterprise customers to use our services..

Okay. So just one follow up question. If we cooperate with content providers over the world, we'll we a-- will we then use all data center, just operators in the 2016. Thank you..

The answer is yes. IDC and CDN is a possible cooperative. .

Thank you. .

Thank you. Our next question is coming from Livia Wu from Genta Securities, go ahead please..

Thank you for taking my questions. I have three here; one is that to follow-up you mentioned you will streamline your marketing expenses. Going forward is this the result of coming down maybe for this year your total expense with client YOY this year? And my second question is about our own future strategy of thousands of subsidies [ph].

And I'm wondering if on there going from telecom [indiscernible] and how do you balance between the subsidies and also the competitive unless getting the telecom market? And my third question is that to follow-up, you mentioned certainly about over half of our new acquisition of the subscribers got on 1,399 plan but I want to make sure which timeframe you refer to because as I remember maybe in the second quarter or third quarter last years on you said -- you have said that over half of our new acquisitions bellow 1,000 because most of the new subscribers are low here.

So I want to know if you are seeing more acquisition that is over $1,520 or if there are any particular timeframe? Thank you..

Could you repeat your question about [indiscernible] -- could you repeat that one?.

Okay. Overall, the Chunghwa feel competitive compared to our peers, so I wonder if there is room for us to lower our overall spends and subsidy, to balance of those subsidies and also the competitive situation in market. .

I think -- currently our many strategies to try to encourage especially mobile costumer to move to high end program, which has a higher hand set subsidy. And also high up -- however, as we just mentioned that we see that a good result. And currently up to open the 1,000 acquisition is over the 50%, and the trend is still going up.

But as you say how about all the subsidies and our market expenses, I can tell you it's just subject to the market competition. The current low-end segments the competition is very intense. And then, we definitely we will defend our market share. On the other hand, we also encourage more and more customers to move to the high-end segment.

So regarding our streamline all marketing expenses, is dynamic and expressible [ph] depends on the results and also see that out market share instead us. .

Thank you. .

Thank you. [Operator Instructions] Our next question is coming from Jack Hsu with Sinopac Securities, go ahead please. .

Okay, thank you. I just have one question, thank you. My question is will we have any number about our future subscribers, in the 2017. Thank you. .

By the hand [ph] 2017, the number will reach $8.4 million..

Okay. Is that $1,400,000..

Yes..

Thank you..

Thank you, I will turn it back over to President Shih. Go ahead please. .

Thank you for joining the call. .

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..