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Edited Transcript of 2412.TW earnings conference call or presentation 30-Oct-19 7:00am GMT

Q3 2019 Chunghwa Telecom Co Ltd Earnings Call

Taipei Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Chunghwa Telecom Co Ltd earnings conference call or presentation Wednesday, October 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angela Tsai

* Fu-Fu Shen

Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR

* Shui-Yi Kuo

Chunghwa Telecom Co., Ltd. - President, CFO & Director

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Conference Call Participants

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* Billy Lee

Crédit Suisse AG, Research Division - Equity Research Analyst

* Jack Hsu

SinoPac Securities Investment Service, Research Division - Analyst

* Neale Anderson

HSBC, Research Division - Head of Telecoms Research, Asia Pacific

* Yufang Lee

Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Third Quarter 2019 Operating Results. (Operator Instructions) For your information, this conference call is now being broadcasted live over the Internet. A 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.

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Angela Tsai, [2]

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Thank you. This is Angela Tsai, the Director of Investor Relations for Chunghwa Telecom. Welcome to our Third Quarter 2019 Results Conference Call. Joining on the call today are Harrison Kuo, our President and Chief Financial Officer; and Fu-Fu Shen, the Assistant Vice President of Public Affairs Department.

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'll move on to the Q&A session.

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

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Shui-Yi Kuo, Chunghwa Telecom Co., Ltd. - President, CFO & Director [3]

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Thank you, Angela, and hello, everyone. Welcome to our third quarter 2019 earnings result call.

During the quarter, the overall mobile market was relatively stable with fewer price promotions to stir the market. We are pleased with our continued leading market position by both mobile revenue and the subscriber numbers during the quarter with market shares of 36.2% and 37.8%, respectively.

Going forward, we will continue to strengthen the overall customer base by providing incentives and popular handset models to retain and attract subscribers in different segments and by further mitigating -- migrating users to higher-price trends to enhance performance in our mobile business.

In our broadband business, we continued to experience small subscriber loss during the third quarter, mainly due to continuous mobile Internet substitution and cable competition. However, we are glad to see our broadband and the MOD bundled package continue to increase and further enhance overall broadband subscriber stickiness.

For the third quarter, our MOD subscribers continued to increase and reached 2.09 million. MOD revenue grew year-over-year as well which was attributable to our successful synergy of satisfying customers with even better quality content and the freedom to package channels based on their preferences.

We are pleased to report that among the new sign-ups of free-to-choose channel plans, which was launched in September, 75% chose the highest-priced package, which we believe will help strengthen our overall MOD business performance going forward. For the third quarter, both enterprise customer revenue and ICT revenue continued to increase year-over-year due to our efforts of business exploration.

Going forward, we will continue to leverage our network advantage and technology capabilities such as mobile edge computing, augmented reality and the Internet of Things to enhance solution development and project acquisitions in different verticals, laying a solid base for the upcoming 5G competition.

Now I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business. We are delighted to report that we continued to have a mobile subscriber net adds in the third quarter of 2019. In addition, handset sales revenue increased year-over-year mainly due to the launch of the iPhone 11 series. We are encouraged to see that the number of users signing up for the TWD 999 or above bundled plan increased significantly this quarter, which we believe is positive for long-term mobile revenue going forward.

It is also worth mentioning that the back-to-school trends rolled out during summer vacation brought in quite a few new bundled subscriptions at higher ARPU than our blended ARPU. Going forward, we will continue to provide popular handset models to satisfy customers and encourage higher bundled plan adoption in the hope of further enhancing the overall mobile performance.

Slide 6 shows the performance of our broadband business. In the third quarter of 2019, the number of total broadband subscribers decreased slightly year-over-year. However, we are delighted to see continued migration of our broadband subscribers to higher-speed fiber services. The number of users signing up for plans with connection speeds of 100 megabits per second or higher grew by 10.6% year-over-year to 1.54 million. The number of subscribers signed up for connection speeds of 300 megabits per second or higher increased by 109% year-over-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 mobile Internet substitution and cable competition. At the same time, we will also focus on developing smartphone-related services, leveraging 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 the third quarter, our IPTV/MOD platform maintained its position as the largest video platform in Taiwan. The number of total subscribers reached 2.09 million, representing a 9.4% increase year-over-year. In addition, our SVOD subscribers continued to increase, maintaining its growth trajectory as well.

During the quarter, although IPTV revenue continued to grow by 5.9% year-over-year, to enhance channel subscription revenue, we rolled out free-to-choose channel packages in September, and we're delighted to see upsell from the overall sign-ups. We expect that its revenue contribution will be reflected in the fourth quarter and enhance overall ARPU.

Going forward, we will continue to differentiate MOD as one of the strongest video service brands in Taiwan by constantly enriching content. We will continue to introduce OTT services and the popular sports events, such as the upcoming Tokyo Olympic Games, to boost subscriber growth and expect that the subscriber base will bring in advertisement revenue to further enhance overall IPTV performance.

Please turn to Slide 8 for an update on our ICT initiatives. In the third quarter of 2019, overall ICT revenue increased year-over-year. As of the end of third quarter, we are delighted that our accumulated IDC revenue continued to grow, gaining a 9.9% year-over-year. Cloud revenue increased 28.8% year-over-year, and the information security revenue increased 9.6% year-over-year.

It is also encouraging that as one of the major bidders in the metering market, we once again obtained the AMI project from the Taiwan Power Company, thanks to our differentiated NB-IoT technology. With the accumulation of more than 300,000 metering devices nationwide, we believe that the project would contribute to our IoT revenue growth going forward.

To further strengthen our ICT performance, we will continue to leverage our leading technology capabilities to develop in-house products and services in order to enhance ICT project margins in different verticals. At the same time, for markets like IDC and the information security, we will also endeavor to expand our market share to further strengthen overall segment performance.

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

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [4]

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Thank you, Harrison. Now I will go through our financial results in detail 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 on our income statement. For the third quarter of 2019, total revenue and operating cost and expenses decreased by 3.5%. Our income from operations decreased by 3.9%, and our net income decreased by 4.9%. Our EBITDA margin increased to 37% in the third quarter from 34.87% in the same period of '18, primarily due to the adoption of IFRS 16 in '19.

Please refer to Slide 11 for a revenue breakdown by business segments. The decrease in total revenues for the third quarter 2019 was mainly due to the decrease in fixed voice revenue, mobile service revenue and ICT project revenue. This offset the increase of handset sales revenue and Internet application revenue. The decrease in mobile service revenue was primarily because of market competition and the VoIP substitution.

Moving on to Slide 12. Our operating cost expenses decreased by TWD 1.47 billion or 3.5%. The decrease was mainly due to lower interconnection costs and ICT project costs. Slide 13 shows that cash flow from operating activities for third quarter of 2019 decreased by TWD 2.08 billion or 9.6%. This was mainly due to an increase in accounts receivable. As of September 30, 2019, we had TWD 23.97 billion of cash and cash equivalent.

Slide 14 shows our operating results as compared to our guidance. For the third quarter of 2019, our revenue, operating income, net income and EPS were lower than guidance, mainly due to lower fixed voice revenue and mobile revenue and the delay of ICT project revenue recognition. We continue to enhance operational efficiencies to offset the revenue loss. However, for the fourth quarter, we expect that the decreases in cost and expenses are unable to offset the decrease in total revenue, mainly due to lower-than-expected ICT project revenue. Thus, our fourth quarter performance is expected to be below guidance.

Moving on to Slide 15. We budgeted CapEx of TWD 29 billion for 2019. The estimated spending by the year-end will be around TWD 26 billion. We will focus our investment in our core divisions, including FTTx, mobile, IDC and our service platform under our precision construction principles.

Thank you for your time. We would now like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Neale Anderson, HSBC.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [2]

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Two questions, please. First of all, on the broadband customer decline, could you give a comment on the competition or what's going on in the market that led to that, please, and if you expect it to continue?

And secondly, on the mobile side. Obviously, you continue to see competition and impact of VoIP substitution. I was wondering if you could give us an update on when you expect that to bottom out and when the mobile performance can start to improve.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [3]

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For the broadband customer, yes, we see some small continuous decrease for the customer base for broadband. This is mainly from the competition from cable broadband -- cable modem services, and this is something is continuous kind of competition. And -- but the good thing is we -- I think the decrease of the customer base and the decrease of the revenue is kind of small, controllable, because we really manage to migrate our customers to high-speed to get some incremental ARPU. That makes the overall impact be kind of mitigated. So that's -- we expect the overall situation will continue for a while, but it's still manageable.

As for mobile competition, as we mentioned, this last quarter, overall competition in the market is a bit slower, easier. It is easier. We found that for Chunghwa, our postpaid customers is actually kind of increase quarter-over-quarter, which is quite encouraging for us. And we will continue to do that, to promote the [stealing] plan, like the subscription, and also we would take advantage of the iPhone 11 series as kind of popular in the market. We will push the bundle plans to push customer to migrate to high-speed -- to higher price plan. That will also enhance the overall performance.

But as you mentioned, the bottom up, in that part, we are still forecasting that in the fourth quarter, the overall mobile ARPU will continue to have a small decline, but -- which will kind of slower than the previous quarter. I would still believe this is a good sign in this market.

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Operator [4]

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The next question is coming from Jack Hsu, SinoPac Securities.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [5]

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I have 2 questions. My first question is about do we have any plan about our MOD subscribers, especially -- I mean before the Tokyo Olympics, do we have any plan we'll increase our -- how many MOD subscribers will be until the second quarter 2020? Because the Tokyo Olympic Games is a good chance for increase of the MOD. So do we have this kind of trend? And this is my first question.

And my second question is about -- I just heard the delay of the ICT revenue. Could you give us about some -- the detail about the delay and how long will the delay? Will the delay until the end of this year or just only third quarter?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [6]

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For the subscriber target for MOD before and after the Olympic game, I think you know currently we are kind of trying to working on the guidance for next year. So currently we -- I don't have really specific number in my head to report. But of course, we -- and we -- and of course you know the content, the broadcasting rights, is still under negotiation at the moment. So currently, I think we won't disclose any subscriber number target for you at this time.

As for the delay of ICT project revenue, I think we -- now is the end of October, we understand -- we try to pick out in fourth quarter how much the ICT project revenue can be recognized at this moment. So we really think in some of the -- since some of this cannot really get recognized. And at the same time, this year we continue to be very selective for the ICT project requirements since the -- we really got into some competitions on the peers. But the thing is, we are very focusing on the margin of individual ICT projects, which probably make us have some revenue lower than our expectation. But overall speaking, this is still good for the bottom line. Thank you.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [7]

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Okay. Just one follow-up question. Will we change our financial forecast right now? Or we will maintain?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [8]

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Of course, we'll continue to maintain our financial forecast, yes, because it's -- at this moment, like I say, it's according to the regulation. We're still in line with the overall guidance. Yes. But of course, for some revenue delay, I think it's still under the -- I think under regulation, I think, is still okay.

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Operator [9]

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(Operator Instructions) The next question is coming from Neale Anderson, HSBC.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [10]

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Sorry, just a couple of follow-ups from me on the network side. Would it be possible to give us an update on current network utilization and how you expect that to trend before the rollout of 5G services next year?

And then secondly, on the CapEx side. I believe your guidance is still TWD 29 billion. Do you expect to reach that guidance this year? Or is there any possibility that you will come in lower than the guidance number?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [11]

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Neale, for your first question, about the mobile utilization rate, I think currently we still have ample kind of capacity. So even before the rollout of 5G, I think our network is pretty good, still fine. As for your second question, about the CapEx, right? I'm sorry, I didn't really follow your -- CapEx, okay. Okay, to reach guidance, will it be lower than guidance. Yes. I think we mentioned about the -- from here, we understand that probably this year, our CapEx spending will be lower than our guidance. The expected number is TWD 26 billion. Yes, TWD 3 billion below our guidance projected number.

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Operator [12]

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(Operator Instructions) Our next question is coming from Billy Lee, Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [13]

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I have a question on the fixed line. So you mentioned that fixed voice is worse than your expectation. And could you tell is there any extra special reason about the decline? That's the first question.

And the second question is regarding the ICT project. In your comment, you also -- you talked about the competition between the peers are getting stronger. So could you elaborate a little bit more on that? And it would be also helpful if you could help me to understand like how revenue recognition works in ICT project. That's my 2 questions.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [14]

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Billy, I think the -- for your first question, the fixed voice, I think probably some -- we didn't really mention about fixed voice is lower than the -- I should say that the fixed -- the overall voice -- fixed voice is decreasing year-over-year. That's a trend. It didn't really accelerate, okay? The real reason for the fixed segment decrease versus our guidance is because of the -- our budgeted ICT project revenue is higher than the real revenue recognition. I hope this explain your question.

As for the ICT project, when I mentioned about the competition between peers is getting stronger, because we understand our peers, I always mention about that we have that -- currently, they have better performance on the ICT project side. But actually, first of all, their base is kind of small versus our base. And secondly, we're always selective in the project acquired since we believe the margin is very important. Otherwise you will spend a lot of resources and get no margin, which is not good. So I think when I mentioned about the competition, yes, that's the reason why I mentioned that. Yes.

And you -- your second part of your last question is how revenue recognition works for ICT project. Usually it's -- we have to get the whole project completed then you can get recognized. You cannot recognize partially. That's the key.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [15]

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Okay. And does the ICT project recognize -- based on Page 11, is it by -- on Internet segment?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [16]

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Sorry, I didn't really follow you.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [17]

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So in Page 11 of your presentation, so you did break down the different business segments. So I was wondering if the ICT project fall in under like Internet, data communication. Where does it fall under? I know there is no specifics.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [18]

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Yes. Understand it's -- that's -- actually, this is something we really need to improve for the segment presentation because basically, really looking to our financial report under individual segment, you got ICT and other in that line. And basically, under domestic fixed, the major portion of ICT revenue is under domestic fixed segment. So it's a bit difficult for investor or analysts to look any table like this. I'm sorry for that. Yes, it needs more explanation for that.

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Operator [19]

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The next question is coming from Jack Hsu, SinoPac Securities.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [20]

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I have 2 questions. My first question is about 5G because right now we will bidding another spectrum. So -- but could you give us some further color about -- will Chunghwa Telecom will prefer the higher bandwidth more than the lower bandwidth? Or what's our first priority when we do the bidding? Because we know right now, this kind of period is a quiet period. So could you just give us some color about your 5G strategy? This is my first question.

And my second question is about the iPhone. Congratulations, because the company has informed us the good sell for the iPhone 11. So will this kind of good sell can still have a good sales performance in the fourth quarter? This is my 2 questions.

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Shui-Yi Kuo, Chunghwa Telecom Co., Ltd. - President, CFO & Director [21]

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Okay. For deployment revenues, 3.5 gigahertz is better than 28 gigahertz. In addition, according to NCC's plan, the intersection of 3.5 gigahertz will be claimed by April next year. So if any operator win a 3.5 gigahertz spectrum, the services migrate to be launched in 6 months as earlier to 1 year after spectrum acquired.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [22]

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As for the iPhone sales, we -- of course, we did expect it. iPhone actually started to sell in second half of the year, September. So we do expect the trend will continue in the fourth quarter, and the overall performance will be presented in the (technical difficulty)

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [23]

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Hello? Excuse me. Oh sorry, I just lost the signal. So could you repeat?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [24]

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Jack?

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [25]

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Yes. I just lost the signal. So could you repeat it? You said that the iPhone will have -- still have good sales in the fourth quarter. So how do we evaluate the contribution of the revenue?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [26]

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I think for the preliminary sales for iPhone 11 series, we found that the overall performance is better than what -- than that in last year. So -- and the trend -- we believe the trend -- we expect the trend will continue in the fourth quarter.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [27]

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Okay. Just one final question. We have a construction trend is the kingdom construction. I read the information on a website. It means this kind of a construction trend will be ended in 2020. So if these kinds of trends are finished and -- so will the Chunghwa will get the profit which -- I mean will get onetime profit or will get the rent fee from the rented?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [28]

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Actually, for the whole company, mother company and the subsidiary, we do have some construction planned for this year. But I'm not sure what you mean about kingdom construction. What's that? I'm sorry.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [29]

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The construction framework. Yes.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [30]

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Okay. That project will be completed the year before next year. So the overall revenue recognition will happen in that year.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [31]

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So will -- I mean that kind of revenue, just onetime profit or will get rent fee from which kind of player?

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Shui-Yi Kuo, Chunghwa Telecom Co., Ltd. - President, CFO & Director [32]

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One time. Yes.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [33]

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It's one time.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [34]

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Just one time? Okay.

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [35]

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Yes. Just one time.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [36]

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So how will we evaluate this kind of profit? Can we evaluate this kind of profit now or will -- according to the price at that time?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [37]

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We'll evaluate that profit according to the value of the rent in the property. So it's kind of versatile.

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Operator [38]

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Our next question is coming from Amber Lee, Yuanta.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [39]

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In terms of 5G investment, last time, the company mentioned that CapEx peak for 5G should take place in probably 2022 to 2024, if I remember correctly. Do you still see that? Or do we expect some degree of acceleration of 5G infrastructure build?

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Shui-Yi Kuo, Chunghwa Telecom Co., Ltd. - President, CFO & Director [40]

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We think the -- we expect 5G CapEx peak will be between 2021 and 2023.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [41]

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Okay. Do we have the degree of the incremental investment as for now?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [42]

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As you know, we have some -- we are working on the CapEx planning for next several years. But I think we're still not ready to disclose at the moment since we still have to watch for -- to monitor the overall market. And of course, like our present business volume, we expect the 5G CapEx peak will be between '21 and '23 since the overall accelerated development of 5G globally. So we'll adjust all the time so we really need to monitor. So at the moment, I don't have any detail for 5G CapEx spending, sorry.

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [43]

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Okay. I have a second question. It's on iPhone 11 sales. I think last year you talked about iPhone sales volumes being down, but sales in numbers goes up. So this year, are we expecting better volume sales than last year?

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Fu-Fu Shen, Chunghwa Telecom Co., Ltd. - Assistant VP & Director of IR [44]

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To let you know, for the preliminary type number, the sales for this year is better than the number we saw last year. Yes, that's true, especially the -- we are -- the iPhone 11 series this year, the price is bit of less lower than that of last year, which is also encouraging customer to continue. Yes.

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Operator [45]

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(Operator Instructions)

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Shui-Yi Kuo, Chunghwa Telecom Co., Ltd. - President, CFO & Director [46]

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Thank you for your participation.

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Operator [47]

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Thank you. 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.