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Edited Transcript of 2881.TW earnings conference call or presentation 22-Nov-19 8:30am GMT

Q3 2019 Fubon Financial Holding Co Ltd Earnings Call

Taipei Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Fubon Financial Holding Co Ltd earnings conference call or presentation Friday, November 22, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amanda Wang

Fubon Financial Holding Co., Ltd. - SVP

* Christine Fung

Fubon Financial Holding Co., Ltd. - IR Officer

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Conference Call Participants

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* Chung Hsu

Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist

* Steven Lam

Bloomberg Intelligence - Analyst

* Ophelia Au Young

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to Fubon Financial's First 9 Months of 2019 Financial Results. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time. Now I hand the call over to your host, Ms. Amanda Wang, IR Officer of Fubon Financial Holdings. You may begin.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [2]

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Thank you. Welcome to join Fubon's first 9-month interim results briefing. This is Amanda Wang calling for Fubon, and we'll have Christine Fung, who'll make a briefing for you first and followed by a Q&A from the audience with the management team. So I will hand over to Christine.

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Christine Fung, Fubon Financial Holding Co., Ltd. - IR Officer [3]

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Thank you. Please turn to Page 4 of the presentation. Fubon Financial made net profits of TWD 53.7 billion in the first 9 months, which represents 7% growth year-over-year, mainly driven by Taipei Fubon Bank. Fubon Life's earnings also improved with decent investment income growth. And in Taipei Fubon Bank, there are 3 operational highlights. Our net interest margin and spread both improved. Secondly, the fee revenue also grew, driven by wealth and management and syndication. And in the overseas business development, our Indonesia rep office was just established in order to capture us some market business opportunities.

And in Fubon Life, the net profit was impacted by underwriting costs increase as the first year premiums grew by 21% with strong premium growth, and for that mix change, we see VNB continuing to grow and with a decent growth over 30%.

For our core earnings drivers, we see recurring return and cost of liability both show improvements.

In Fubon Insurance, we see overall business momentum continues to be strong. We've hit top 1 position in the market, while the net combined ratio remains at healthy level.

In Fubon Securities, we achieved top 3 positions in brokerage and the emerging stock trading business, while the ETF continue to be our focus.

Please turn to next page. The overall net profit reached TWD 53.7 billion in the first 9 months, which is a 7% growth year-over-year and translated into TWD 4.99 per share. We maintained top 1 position among peers.

In Page 6, in terms of our earnings contribution from the pie chart on the right-hand side, you can see that Fubon Life contributed nearly 50%, followed by 37.4% from the rest of 3 banking subsidiaries.

In Page 7, we see the asset and equity both show sequential improvement and also reached historical quarterly high level.

In Page 8, ROA and ROE on annualized basis were 0.9% and 13.7%, respectively. And ROA is down due to the asset size increase, while the ROE improved and maintained at decent levels.

Please turn to Page 10, the next session regarding Taipei Fubon Bank. We see that revenue growth came across all business lines and the total revenue showed 12% growth.

In Page 11, the credit growth, we see that overall speaking that is 5.1%, and the corporate credit and retail loans both show healthy growth momentum. Among consumer loans, the personal loans have been our -- one of our focus and delivered 19% growth year-over-year.

In Page 12, from the corporate banking side, we see NT dollar-denominated row of credit shown 9.6% growth year-over-year, while the foreign currency credit moderately declined year-over-year due to quarter end fund demand, while the growth rate was 4.7% on average balance.

On the right-hand side, you can see that SME is another focus area. You can see that it grew at 3.4%, and the contribution to the total corporate credit is 43.3%.

In Page 13, regarding the liability side. NT dollar deposit mix shows improvements with demand deposit contribution increased to 57.5%, while the volume continued to grow. And in foreign currency dollar, the LDR improved to 41.4%, with our deployment for overseas fund investment, overall utilization of foreign currency deposit reached 78.6%, which is nearly 12% growth year-over-year.

In Page 14, with the extension in our foreign currency assets and our liability side adjustment, the overall margin improvement reached 8 basis points in the first 9 months and the loan deposit spread also expanded by 11 basis points.

In Page 15, on the asset quality side, the bank maintained daily performance and also outperformed the industry average.

In Page 16, we share with you another growth driver coming from fee income. The overall fee income growth reached 24% driven by double-digit growth in wealth management and syndication business.

On the right-hand side, you can see strong wealth management fee performance, largely contributed by the growth in insurance and nearly 200% growth in the overseas bonds sales.

For the earnings for our overseas branches, we continue to see it -- view it as a strong growth engine. You can see the overall revenue growth is 25%, and the contribution to Taipei Fubon Bank's profit now reached 17% -- 17.2%.

Next, we move to Fubon Life. Please turn to Page 19. Total premium growth at 12.5% with first year premium growth of 20.9% as key growth driver, that get us to the #1 position in first year premiums and top 2 in total premiums.

In the following page, you can see the driver of this strong FYP growth, mainly from the regular pay transition policy, which contribution increased to 53.5% versus 33.9% a year ago. The result also reflects our value-driven product strategy and regular-paid traditional and protection type of policy will continue to be our focus.

In Page 21, as a result of strong FYP growth and product mix improvement, both value of new business and FYPE delivered over 30% growth, along with VNB to FYP ratio improvement.

In Page 22, in terms of the channel mix, the internal channels in Taipei Fubon Bank by agent and also our insurance brokers show over a 50% contribution from both FYP and FYPE, while external bank's contribution also increased with strong regular-paid policy sales.

In Page 23, we move on to the investment side of Fubon Life. We see the total investment portfolio grew at about 9.6% and for the allocation mix, we reduced domestic fixed income and increased some more into overseas fixed income asset in the third quarter. We continue to overweigh into overseas fixed income, along with yield curves steepening.

In Page 24, overseas fixed income portfolio, the allocation still predominantly in the corporate bonds and financial bonds. And in terms of the geography exposures, North America accounts for the majority.

In Page 25, the investment income primarily still came from recurring income. This dividend income from equity investments and mutual funds were the key growth drivers. Other than recurring income, the capital gains from fixed income contribution increased, up by nearly 240%. The investment return improved to 4.14% in the first 9 months after hedge basis.

In Page 26, regarding hedging performance, the hedging cost came down sequentially along with interest spread narrowing between Taiwan and the U.S. because of the strengthening new Taiwan dollar. From the pie chart on the right-hand side, you can see our hedge position slightly increased quarter-over-quarter. And currently, as of the September, our outstanding FX reserve increased to TWD 12.5 billion.

And before and after hedge recurring return both showed improvement in the first 9 months, mainly because of the dividend income from mutual fund increase and hedging cost improvements.

In Page 27, we see cost of liability continuously improving, down by 6 basis points year-over-year to 3.61%, mainly due to the new business. And the breakeven point went up to 2.95%, mainly because of the higher FYP growth and also the contribution from regular-paid products, and therefore, leading to stronger first-year strength.

In Page 28, the unrealized position shows sequential improvement quarter-over-quarter due to mark-to-market value recovery from the fixed income and equity assets. The unrealized balance was TWD 38.5 billion as of September.

Next session is Fubon Insurance in Page 30. We delivered 8.5% year-over-year growth in premiums with leading market share of 24.3%. The net combined ratio slightly increased, but still outperforming peers.

In Securities in Page 32, the market share of main business still maintained the top 3 position. And the AUM of asset management business grew at 87%, which is one of the spotlights for the first 9 months. Despite the lower daily turnover of [sites] we see the support from the gains from the capital market, we see the overall revenue grow at 1.6%. The net profit increased by 11.7%, largely due to the one-off credit loss recognition in previous year.

Next session regarding Fubon Bank China in Page 34. Overall balance sheet items continued to show strong growth. We delivered over 20% growth in loans, over 40% in deposits. Strengthening deposit base continues to be our strategy to support asset sale expansion.

In Page 35, the net profit increased substantially at 80%. One of the driver is strong loan growth and the margin increase that lead to net interest income growth, and the other one is the treasury activities.

And for our asset quality, it remained at a very stable level.

I'll stop my presentation here. Thank you.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [4]

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Okay. Thank you, Christine. And now we'll open for Q&A from the audience. So operator, could you please take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Chung Hsu.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [2]

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This is Chung from Crédit Suisse. I have 3 questions. The first is on your FX reserve. I think last year, around November or December, Fubon Life took some extra FX reserve. So I wanted to ask, given the earnings momentum is tracking ahead of both consensus number, is there any plan to take extra FX reserve this year?

My second question is I want to clarify that when Fubon Life calculates its recurring yield on the denominator or the asset body, do you use your cost basis or do you use the body after mark to market to calculate that recurring yield?

My third question is on Fubon Bank China. Broadly, I want to know how you plan to manage this bank because if I look at how fast your asset growth against your capital base, I don't think your current capital position will last very long. And in fact, if I look at your provisioning level, it feels like the bank is under-provisioning because your total reserve to total loans is falling very quickly. As I take your NPL ratio multiplied by your coverage ratio, that ratio dropped from 2.3% last year to 1.8%. I think most bank in China are maintained at least 2.5%, and many of them maintaining well above 4%. So it seems that the bank is trying to preserve some capital. So I just want to think that -- that whether there's any plan to inject capital? And whether that would be done in 1 shot or something that you're planning to do gradually over time? I'll stop here.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [3]

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Okay. Sure. Maybe I can start from your first question. Regarding FX Reserve, well, I think it continuously be one of our agenda that we will evaluate. But at this moment, we don't have a concrete plan to report to you yet. I think this is an ongoing project. We will monitor and feedback to market when it's publicly announced.

And the third question regarding Fubon Bank China, again, the capital position, yes, we also closely monitor. But I think, firstly, the asset quality from our perspective is still very benign and follow the loan growth now largely toward SOE or the government-related sector. So we are quite satisfactory with its quality status at this moment. But having said, the capital position, we also considering to issue debt for most of bonds, et cetera, to support its -- diversify our funding. While the other source of capital, I think, is also under consideration. But at this moment, we don't have announcement yet.

And I think the second question, I'm not very sure about your topic, can you reiterate again?

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [4]

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Yes. If we look at your return yield for Fubon Life, just when you calculate that yield, the denominator, do you use your asset using the cost or the mark-to-market value? So if you mark to -- if that asset hasn't doubled, do you still use your cost to calculate that return yield or do you use the new market price to calculate that recurring yield?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [5]

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I think we'll get back to you later on that. But Chung, can I know why you specifically want to check into these parts?

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [6]

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Yes. Because market price has increased quite a lot year-to-date, right? So if you want to appreciate or are taking into account the increase in market value or your shareholders' equity, then we should take simultaneously the impact on the return yield because it's just -- it's when you realize gain and you invest -- I mean, we have to reassess that yield. So I just want to know whether -- it's the question not only for Fubon, it's probably applied for all the insurers. Just trying to get a sense whether do you know the adjustment each quarter or it's something that's on a very static constant basis?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [7]

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Okay. Understood. Okay. Thank you. I think in Page 23, regarding the investment portfolio, how we reported is in line with accounting basis. So loans under cost, for example, there will be cost, while loans under OCI, those will be market, that's for Page 23. But for Page 26, the recurring returns calculation that's a -- I'll double check and get back to you.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [8]

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Sure. Just can I follow-up on Fubon Bank China? Say, if you do need to make a -- because you mentioned Formosa bond, but that's Tier 2, right? But if you do decide to make a -- or need to make a capital injection to Fubon Bank China, should we take that into consideration when you think about your dividend payout or that will be handled separately using other instruments at holding company?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [9]

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I think for holding company level, the dividend policy remains similar as how we've communicated with markets earlier, i.e., we aim for a steady payout ratio policy in the range of 14% to 15% payout.

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Operator [10]

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No questions at the moment. (Operator Instructions) We show no questions at the moment. (Operator Instructions) Okay, we just got 1 question, it comes from Steven Lam.

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Steven Lam, Bloomberg Intelligence - Analyst [11]

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Just have a quick question on the life insurance side. So if I'm not mistaken, I think the third quarter NBV (sic) [VNB] growth was very strong, close to 42%. Of course, it's driven by the 51% increase in FYPE growth in the same quarter. So looking at the October number, it seems that FYPE has come down a little bit. Just curious, can we expect that the sort of margin to be stable in the coming quarter or so? And then the FYPE growth will sort of come off from the high point?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [12]

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May I clarify, are you talking about single quarter performance?

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Steven Lam, Bloomberg Intelligence - Analyst [13]

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That's right, single quarter. Yes. Single quarter, yes. The 9 months was about 32%, right? So single quarter in fourth quarter alone, about 42%, that's just my rough calculation, yes.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [14]

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Yes. So just trying to see the VNB's high-growth in the single quarter's background?

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Christine Fung, Fubon Financial Holding Co., Ltd. - IR Officer [15]

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Yes.

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Steven Lam, Bloomberg Intelligence - Analyst [16]

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Right. Well, it has been pretty good for the past few quarters already.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [17]

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It is.

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Steven Lam, Bloomberg Intelligence - Analyst [18]

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And the fourth quarter, I think there's going to be some high base -- yes, there should be some high base, so...

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Ophelia Au Young, [19]

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Yes. We tried to adjust our product mix since early this year. And we gradually switch from single premium to 2-pay, 3-pay, 4-pay, and for the last quarter, we gradually shifted to 6-pay, and those products are fixed interest rate guaranteed product. And the VNB margin is pretty high. So we expect the trend will continue until end of this year.

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Steven Lam, Bloomberg Intelligence - Analyst [20]

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I see. And actually, if I can follow-up with another one on the investment side, I think on the Chinese call, the comment was made that the management is, I guess, not too bearish on the yield environment. Could we elaborate a little bit on that? And with the sort of comfort in the investment yield, at least on the recurring side, would it come from just the market dynamics or it's more from your change in the allocation?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [21]

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So you are talking about our new money outlook or even the recurring yield cost?

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Steven Lam, Bloomberg Intelligence - Analyst [22]

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Yes, I guess, that would be for both. Yes, please.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [23]

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Okay. Okay, maybe we are start talking about the new money rate. And the reasons why we -- I think it could be a little positive is because the effect of the interest rate cut in U.S. could rearrange, come to in light both in the [NCR] economy recovered and also stimulating the economic growth. Therefore, there may be a possibility for the yield curve to be -- to steepen, which potentially means that there may be also a possibility for us to increase our new money rate. And accordingly, about the recurring yield, it's just our assumption that if there is no more trade war worsening then, the curve could be steepened, then we are expecting our prehedge recurring yield to be maintained, similar as last year. And also for the post-hedging recurring yield, it's because the interest rate debts, the [U. S. and Taiwan] now look like it could be just maintained. So we expect the hedge costs to be significantly lower [this] year compared to last year. That's our also -- our post-hedge costs recurring yield could be also improved.

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Steven Lam, Bloomberg Intelligence - Analyst [24]

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Actually, -- yes, sorry. And it's nice that your table shows the quarter-on-quarter change in the investment portfolio. Just a quick follow-up. On the domestic fixed income side, you mentioned that the outstanding balance have come down between June and September. May I ask, this is because of -- did you sell some like bond ETFs? Or have you still been adding on the Taiwan dollar overseas bond ETFs? Any dynamics there that you can share, please?

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Ophelia Au Young, [25]

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Okay. About the number you see, it's (inaudible) speaking here. We say, actually, we decreased some position, [major come down sales] -- we did sell some local government bonds and about the NT dollar it actually, we just could maintain a similar level at the quarter 2 that we do some rebalance because here is -- here was some -- the [noise] in the industry in, say, late the third quarter. So we take a lot of advantage or opportunity to realize that or to build gain from that.

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Steven Lam, Bloomberg Intelligence - Analyst [26]

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Sorry, do you realize the gains on the local government bonds or...

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Ophelia Au Young, [27]

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Local. (inaudible) came from...

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [28]

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Government bond and ETF, both have some position reshuffle.

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Operator [29]

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We show no questions at this time. Again, speakers, there are no questions over the phone at this time.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [30]

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Okay. Well, if no more question, then I appreciate your call today. If any question we can follow-up, please come to us at Fubon. Thank you.

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Operator [31]

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Thank you. And that concludes today's conference. Thank you for your participation. You may now disconnect.