Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company’s Second Quarter 2019 Operating Results. During the presentation all lines will be on listen-only mode when the briefing is finished the options 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. The 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 Ms. Angela Tsai, the Director of Investor Relations. Ms.

Tsai, please go ahead..

Thank you. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom. Welcome to our second quarter 2019 results conference call. Joining me on the call today are Harrison Kuo, our new President, and Fufu Shen, the Assistant Vice President of Public Affairs Department.

President Kuo assumed the position on May 8th, and now remained our Chief Financial Officer as well. During today’s call, management will begin by providing an overview of our business during the quarter followed by a discussion of operational and financial highlights, and then we will move on to the Q&A session.

Now, I would like to hand the call over to President Kuo, and please note our Safe Harbor statement on Slide 2. President, please go ahead..

Thank you Angela and hello everyone, welcome to our second quarter 2019 earnings result call. During the quarter, the overall mobile market remained competitive. However, we continued to hold the leading market position by both mobile revenue and subscriber numbers in this quarter with market shares of 36.2% and 37.8% respectively.

Going forward, we will continue enhancing customer retention incentives to solidify existing subscribers, and further migrating users to bundled or higher price plans for incremental ARPU to mitigate the down-sell that happened in 2018. MOD subscribers continued to increase and reached 2.08 million. Revenue grew year-over-year as well.

We attribute this growth to our successful strategy of satisfying customer demand with quality content, including popular OTTs.

Moreover, the introduction of the free to choose channel plan which allows customers to package their own plan entirely based on preferences is expected to bring new experience for our existing and new customers and further differentiate MOD from other video services in the market.

In our broadband business, we experienced a small subscriber loss for the first half mainly due to continuous mobile internet substitution and cable competition. To mitigate the impact, we are providing home-centric digital convergence plans that bundled services including broadband, WiFi, and MOD/OTT services to satisfy our customers’ need.

For the ICT business, we aimed to leverage our network advantage and technology capabilities to strengthen project acquisitions and business exploration. Currently, digital finance is one of our areas of focus, and we continued to win major FinTech projects from the financial industry and governments.

I’m also glad to report that our strategic investment, the Next Bank, just won the internet bank operation license from its competition. We believed it would be one field where we can show our IT strengths and FinTech capabilities.

Going forward, we will further develop capabilities in cutting-edge technologies, such as MEC, AR and IoT, to enlarge our ICT capacity in different verticals in the upcoming 5G era. Now I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business.

In the second quarter 2019, we were impacted most by the relatively higher revenue base in the prior year due contract cancellation fees for 499 promotions among the Big 3. Competition and down-selling remained in the market, causing overall mobile performance to be relatively weak.

To further enhance mobile performance, we maintained our strategy of guiding subscribers to adopt higher price plans during the quarter. Higher price bundled plan subscription increased specifically for iPhone models quarter over quarter.

However, given that SIM-only adoption continues to increase and that the handset replacement cycle is becoming longer, we still expect mobile ARPU to decline slightly for the whole year. Slide 6 shows the performance of our broadband business. We are delighted to see a continued migration of our broadband subscribers to higher-speed fiber services.

In the second quarter, the number of users signing up for plans with connection speeds of 100 megabyte per second or higher grew by 10.6% year over year to 1.5 million. The number of subscribers signing up for connection speeds of 300 megabyte per second or higher increased by 120% year over year.

In addition, our VPN subscribers in medical field continued to migrate to higher price plan, which contribute incremental ARPU to enhance the overall broadband revenue this year.

Going forward, we will maintain our strategy of migrating customers to higher speed services to capture incremental ARPU and to mitigate the impact of the mandatory tariff reduction from the regulator.

At the same time, we will also focus on developing smart home related services, leverage, marketing tools such as Hami Points and package more popular plans to enhance overall broadband revenue. Moving on to Slide 7. We are glad to report another robust quarter for the IPTV business.

In second quarter, our IPTV/MOD platform maintained its position as the largest video platform in Taiwan. We reached 2.08 million subscribers, representing a 15.3% increase year-over-year. In addition, our SVOD subscribers reached 1.3 million, maintaining its growth trajectory as well.

During the quarter, we continued to stay ahead of our competitors in the video business. Overall IPTV revenue continued to grow with a 9.3% increase year-over-year. To attract subscribers, we continued to enrich our content by introducing OTT services and exploring opportunities for original content investment.

Going forward, we will further focus on enhancing our platform capability to facilitate MOD to be more favorable to precise advertisements for commercial buyers, to pave a new revenue stream for enterprise customers, and to be able to provide better multi-screen user experience for retailed customers.

Please turn to Slide 8 for an update on our ICT initiatives. In the second quarter of 2019, overall ICT revenue increased year-over-year. We are delighted that our IDC revenue for the first half continued to grow, gaining 18.8% year-over-year. Cloud revenue increased 20.9% year-over-year, and information security revenue increased 9.4% year-over-year.

In addition, to maximize revenue and opportunities, we will be more selective of our verticals. Digital finance is one of our focuses since we have advantages in IDC, information security, big data analysis, blockchain, FinTech patents and capabilities to link with international PaaS resources.

In fact, we have acquired many FinTech projects in the financial industry. Going forward, with our AI and IoT related capabilities, we will continue to reach out to other verticals, such as smart industry, smart city and smart agriculture to enhance the overall ICT performance.

Now, I would like to hand over the call to Fu Fu for our financial results..

Thank you, Kuo. Now, I will go through our financial results in details, beginning on Slide 10. Please note that all the comparisons are made on a year-over-year basis, unless otherwise stated. Slide 10 provides you with highlights from our income statement.

For the second quarter of 2019, total revenues decreased by 6.6% and operating costs and expenses decreased by 4.3%. Our income from operations decreased by 14.5%, and our net income decreased by 13.1%. Our EBITDA margin increased to 38.1% in the second quarter from 37.3% in the same period of 2018 primarily due to the adoption of IFRS16 in 2019.

Please refer to Slide 11 for revenue breakdown by business segments. The decrease in total revenue for the second quarter 2019 was mainly due to the decrease in mobile service revenue, which offset the increase of handset sales revenue and internet revenue.

The decrease in mobile service revenue was primarily because of market competition and VoIP substitution. Moving on to Slide 12, our operating costs and expenses decreased by NT$1.8 billion, or 4.3% mainly due to lower personnel and interconnection costs and the reversal of bad debt provision.

Slide 13 shows that cash flow from operating activities for the second quarter of 2019 decreased by NT$1.16 billion, or 6.8%. This was mainly due to a decrease in accounts payable. As of June 30, 2019, we had NT$36.58 billion of cash and cash equivalents. Slide 14 shows our operating results as compared to our guidance.

In the second quarter of 2019, revenue was lower than our second quarter guidance mainly due to lower handset sales, mobile service revenue and ICT revenue. Furthermore, our operating income, net income and EPS were lower than our second quarter guidance. Moving onto Slide 15. We are budgeting CapEx of NT$29.0 billion for 2019.

We will focus on investment in our core businesses, including FTTx, 4G, IDC and service platform under our precision construction principle. Now we are open for Q&A session..

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Billy Lee of Credit Suisse. Go ahead please..

Hi thank you for the opportunity to ask question. Question on the competition landscape in mobile business. I’m curious to know are you see any change in behavior from the other two operators as well as some of the pure players..

Are your question is regarding the mobile landscape, is there any behavior changes of other operators..

Yes. Correct..

Okay, since you know the landscape is potentially as you know competitive for sure, that we since last year know turbulence in I think its getting more stabilized and the smaller ones you know although they continue to have this low price plan and I think totally they - for the past quarter they taking seeking some tier but very small and overall market is getting more stabilized..

Okay and then as a follow-up question on that what is your outlook in the second half of 2019, how confident are you in achieving your guidance..

For performance roughly in our guidance but the top-line lower than guidance. Since you expect the major revenue increase in 2019 ITT revenue which is more amount in the second half inside of it.

Additionally we anticipate models and the various mobile app under promotion trends where therefore some revenue increase in the first quarter, year-over-year..

Okay. Thank you..

Thank you. The next question is coming from Jack Hsu from Sinopac Security. Go ahead please..

Hello do you hear me question. Thanks for giving me chance to ask question. I have two questions.

First question could you give some color about the banking business because we were pleased to operate with their bank and online banking business, could you give color about this kind of online banking, how do we tackle it kind of business, how much of this kind of business will come from revenue, that is my first question.

And my second question is about, we see the added value, the mobile added value business, the growth rate seems to shrink in the second quarter, could we know what has happen in this kind of business or just one quarter number doesn’t mean too much information. Thank you..

Jack, please repeat your second question..

Okay. My second question is, I want to know about our mobile added service business. We see the growth in the 6.9% year-over-year. And, but in the first quarter, the growth was 30%, so I'm interested in what happened in that segment. Thank you..

The first question, we aim to leverage our telecom Big Data analysis capability, information security advantage and Fintech patents to team operates our partners to develop digital finance in innovative businesses.

So increase our telco revenue as well as increased customer stickiness and increased revenue by operating our smart digital financial services..

Jack, and about your second question, because you know we, since we entered into 4G business, we didn't separate out the any mobile VS revenue. I don't know the number information is gathered. But for my opinion, with mobile business in the second quarter. The overall revenue declining.

The mobile service revenue declined, fortunately, we understand the competitive market, that is one of the reason, in the last year, the basis for last year, we still have this cancellation - contract cancellation fee kind of increased in last year - in fall in April and in May and of course and the overall service revenue trends is declining.

I think that is the reason for mobile service revenue declining. But for our sales, hence our smart device sales, we are doing good in the second quarter, especially, our presentation about - in presentation, I think our iPhone bundle plan sales are doing fine versus that of those last year, and the - so all those hitting the sales.

Largely because - you probably are understanding now - agreeing that 100% plan, because is a SIM-only plan, not a bundle plan. So we have less handset sales for sure. So in second quarter, the explanation for the mobile business, just like a nation. Hope this answer your question..

Thank you..

The next question is coming from Neale Anderson, HSBC. Go ahead, please..

Hi there good afternoon. I have two questions please. The first one is MOD breakeven, because we asked about this before and this quite the recent growth there. Can you give us an update to what you expect breakeven in MOD segment? And then second one is about mobile distribution.

For several years, there was a very pronounced cycle of very popular handset and I guess mobile operator distribution evolved to match that for global stores, a lot of agent. Do you feel like when you come back you got more cost you can take out your mobile distribution through the store, the agents. That would be great. Thank you..

Okay. In mobile business - in first half 2019 higher we are still need to monitor for the foreign quarters for the performance this year. We proof it is amount service have us and we tend our broad band subscriber in the long-run..

For your second question, why mobile distribution I think of course the mobile currently have many stores and if you know that we have this last year we are very focusing on Internet store. So we diluting those, this is a current streaming in the future.

So, for the typical store in we will give and we further location for the man power, we view as the every month. We try to downsize tie to the inter combine with some location to get there. So, we continue to move in the year efficiency of individual store. We are working on this..

Okay..

Thank you. [Operator Instructions] The next question is coming from Billy Lee Credit Suisse. Go ahead please. Billy you are online, please go ahead.

Yes, yes. Okay. Thank you again for the opportunity. So I have question on 5G, may I know what is your latest thinking on the timeline of 5G requirement particularly the pressure on the spectrum option as well as the second thing with rationalization.

And regarding the spectrum auction what is the bidding strategy for Chunghwa Telecom and do we have any expectations of budget in the upcoming auction. Thank you..

Thank you. Auction will be held in December of 2019, we expect it will be hopefully complete in the early next year. For the deployment revenues 3.5 gigahertz is better than 28 gigahertz. According to ant phase planning in the series section of 3.5 gigahertz will update by April next year.

So, if any operator will use 3.5 gigahertz spectrum the trend is likely to be launched in six months at as license acquired..

Okay. Thank you..

Your last question is on management strategy and budget for the auction, right?.

Yes..

Strategy wise of course you know, first of all you know tight and I guess this is kind of internal kind of deduction we're not to disclose. Strategy wise you know the accounting, the balance seems bit of limited for five players. We understand that part in terms that we are thinking about optimal size that is the current situation..

Okay. Thank you..

Thank you very much. The next question is coming from Amber Lee, Yuanta. Go ahead please..

Hi, I have two. First to follow-up on Billy’s question, so how would you describe the competition landscape specifically on spectrum auction. Do you think its going to be more competitive then the 4G, which is going to be less competitive. Just trying to map out how the auction cost is going to be like.

And then secondly I think over the past few months there have been some countries starting to provide 5G services to subscribers. If we take a look at how they are doing right now, do you think that would somehow affect your strategy on 5G including the timeline that I just mentioned or the amount of investment in all other effect with that record.

Thanks..

I’m sorry can you be a little bit louder for the second question..

Okay so the second one is there has been a lot of countries starting to provide 5G services to their subscribers and if we take a look at how they are doing right now do you think there was overall timeline on 5G say we should take a more conservative tone on it or something like that. Thanks..

First, we aim to acquire bandwidth at a reasonable price for the upcoming 5G auction..

So my second question Amber is, so we understand that in like Korea they actually give some target for operator for the 5G deployment. As that to the service launch the overall quality is not with customers demand.

So the regulatory ask them to do a bit more for the coverage and of course right now we follow the NCC regulations because we have already approve cause of detail regulation disclose. So we follow the regulation to do the deployment. So currently we don’t really have a comment on this..

Okay. Thank you..

Thank you [Operator instructions] The next question is coming from Billy Lee, Credit Suisse. Go ahead please..

So again, last question actually. What is your different policy at the moment? And secondly, what is CapEx outlook like potentially going to 2020? Thank you..

I do the deployment. So currently, we don't really have dividend policy, actually, no we have a quality of operation, we have to pay more than 50% of our earnings as dividend. But for in this year you know the track record we pay, absolutely no, we don't have to set aside [indiscernible] but when you actually pay.

How much we earn if we pay for the whole - close to a 100% payout ratio. So I think, this is now a really policy, but I would say that every year we have to submit it, our proposal to the Board and to the AGM for approval. But most reasonably kind of guessing we will continue, we don't [Technical Difficulty]..

The next question is coming from Billy Lee, Credit Suisse. Go ahead. Thank you..

Sorry for asking again, I think there was some disconnection just now. Sorry, I couldn't see your respond in the second question about the CapExinto 2020..

Yes. I think I will restate the statement. The overall CapEx for our next few years will kind of stabilize versus of that of this year. Starting from 2020 to 2024 we believe that the 5G CapEx peak will be between 2022 to 2024. That is our current expectations..

Okay Thank you..

Thank you..

[Operator Instructions].

Okay. If there no further questions. Thank you for joining us, bye-bye..

Thank you, President Kuo. Thank you for your participation in Chunghwa Telecom'sconference. They will be webcast replay within an hour. Please visit www.cht.com.gw/irr. On the IRR calendar session. You may now disconnect. Good bye..