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Edited Transcript of 3045.TW earnings conference call or presentation 25-Jul-19 8:00am GMT

Q2 2019 Taiwan Mobile Co Ltd Earnings Call

Taipei Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Taiwan Mobile Co Ltd earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rosie Yu

Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary

* Zhichen Lin

Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & 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 morning. Good afternoon, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Mr. Jamie Lin.

Mr. Lin please speak on your call, and I will standby for the Q&A.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [2]

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All right. Good afternoon and welcome to Taiwan Mobile Second Quarter 2019 Investor Conference Call. Before I start our presentation, I would like to direct your attention to our disclaimer page, which states the information contained in this presentation, including our forward-looking information, is subject to change without notice whether as a result of new information, future events or otherwise. In Taiwan Mobile Company Limited, hereafter the company, undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation.

All right. Let's turn to business overview. I will start with the operating performance of our telecom business.

So let's just take a look at trends in the overall telecom market. After the 499 frenzy last year, not only are the majority of consumers locked-in to contracts with the big three, but a gap in monthly rate between the big three and the 2 smaller players has narrowed meaningfully. Therefore, the smaller players' Y-o-Y decline in telecom revenue has further deteriorated in spite of extra promotional effort.

The big three, on the other hand, are seeing stabilization in Y-o-Y revenue trends, even with last year's high base for penalty income -- from penalty income.

As for mobile service revenue, despite the steeper Y-o-Y decline in 2Q, TWM still post higher spectrum yield than our peers as shown in the bottom-left chart. Thanks to TWM's superior spectrum investment strategy.

Now let's take a look at -- now let's talk about our mobile strategy for consumers. To overcome the headwind on ARPU from customers shifting to SIM-only plans, in addition to promoting iPhone bundles, we have also enhanced our bundle plan offerings such as bundling handset plus home appliance products, so-called red plus green, to encourage customers to sign up for higher monthly rate plans, and the results have been very encouraging.

As for the enterprise segment, we posted decent growth in a diverse set of cloud-based services, including hybrid cloud, information security solutions, Cloud PBX, which stands for private branch exchange services, et cetera. We were also able to produce new customer wins.

For IoT connectivity, the off-peak growth is stemming from our wins in government's Smart City projects and other opportunities such as Internet of Vehicle and smart meters.

Last but not least, we posted very strong ICT service growth as we strive to provide integrated solutions to our enterprise customers from equipment procurement to data center design and to cloud and IoT service.

Next is our pay-TV business. We fared better versus other leading MSOs with a smaller loss in basic TV subscription. To provide tailwind to our ARPU, we managed to grow customer adoption rates of DTV and broadband services as of 2Q '19. To strengthen customers' stickiness, we are getting ready to release a new cross-sale bundle package in 2H this year.

Moving on to momo. Let's take a look -- quick look at Taiwan's e-commerce market first. So momo is currently the #1 player and is one of the few e-commerce platforms that have delivered stable profits. In 2Q, momo once again outpaced its peers by growing its B2C revenue by 30% Y-o-Y, while gross margin edged down due to 3Cs rising share in the product mix. Operating margin still grew Y-o-Y, thanks to economies of scale.

Now let's let me turn over the presentation to Rosie for our financial overview.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [3]

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All right. Good afternoon. Let me talk about the performance by business.

In the second quarter, Taiwan Mobile's consolidated revenue rose by 4% year-on-year as momo's strong e-commerce revenue growth compensated for the decline in mobile service and pay-TV revenue. Pre-IFRS 16 EBITDA for telecom business faced a high base due to the 499 frenzy, but the year-on-year decline had already started to stabilize in June, aided by lessened revenue headwind and savings in traffic costs and selling expenses. For pay-TV business, even though pre-IFRS 16 EBITDA dipped by 3% due to softer basic TV revenue, operating income grew by 11%, a function of falling depreciation of set-top boxes.

Let's go to the results summary page. In the second quarter, the combined operating income of pay-TV and momo increased by 9% year-on-year, helping mitigate the decline in telecom operating income. For the first half of the year, the slight miss in total revenue from weak telecom performance was offset by lower traffic costs and selling expenses.

Overall, operating income for all major businesses was within management expectations and net income also reached company's guidance.

On the balance sheet analysis, the significant drop in other current assets was because of the reversal of interim payments accrued a year ago. The increase in inventory is a result of momo's expansion.

On the liability front, deleveraging on the back of our healthy free cash flow coupled with conversion of CB, pushed our gross debt to decline by 22% year-on-year to TWD 37.4 billion.

The outstanding CB amounts at the end of June was TWD 5.1 billion. As for shareholders' equity, CB conversion value also caused our paid-in capital and capital service to go up by TWD 3.5 billion in the second quarter.

Our net debt to pre-IFRS 16 EBITDA ratio further improved to 1.03x, thanks to lower debt.

Now let's turn to the cash flow analysis page. For operating cash flow, the year-on-year decline in the second quarter reflected not only the decline in pretax earnings, but also a higher corporate tax rate on higher taxable income.

For investing cash flow, the year-on-year increase in outflow, in spite of falling CapEx, was attributable to higher cash inflows from fund redemptions in the previous year.

For financing activities, the net cash outflow mainly came from debt repayment and cash dividend payments to momo's minority shareholders.

As to our free cash flow, the free cash flow yield of 5.6% at the end of second quarter, still stood higher than our dividend yield, despite the negative impact from lower operating cash flow.

Now let me turn the presentation over to Jamie for event updates and key message.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [4]

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All right. So the awards and recognition slide summarizes the awards and recognitions we have received in the second quarter for your reference. And then finally, to wrap up our presentation, we have a key message that we'd like to deliver.

Taiwan Mobile started seeing improved fundamentals with June operating results stabilized compared with a year ago. Joining forces with digital leaders, including momo and AppWorks companies, to offer compelling service bundles volume will prove to be our winning strategy.

Looking forward, as we approach the tail-end of 4G deployment, we will be in a good position with more financial flexibility to make strategic moves, expand our footprint and generate healthy returns for our shareholders.

With that, I would like to open the floor for Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Neale Anderson with HSBC in Hong Kong.

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

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Just wanted to ask about the TV business, in terms of the softness in the basic TV revenues. And could you elaborate a bit -- and I think Rosie you mentioned an increase in other operating income. So that's the first question relating to the TV sector.

And then on the cost side, I think you mentioned lower traffic cost was one of the offsetting factors in the quarter. Why is that? Is that likely to continue? That would be very helpful.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [3]

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Well, for our TV business, the earnings increase came largely from a much lower depreciation expenses. As the set-top boxes that we procured a few years ago, the majority of those have been fully depreciated. And then for telecom business, the traffic cost decrease was due to the lower interconnecting rate. (inaudible) basis the rate has been lower, and we also have lower minutes of use.

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Operator [4]

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(Operator Instructions) Our next question comes from Jack Hsu with SinoPac in Taiwan.

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

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I have 2 questions. The first question will -- the company will change our financial forecast in the following years? And this is my first of questions.

And my second question is, how -- just your viewpoint for the 5G in the future, especially the 4G to TWM? And what are the advantage when we develop the 5G and what are the disadvantage when we develop -- when we developing the 5G.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [6]

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Let me answer your first question on financial forecast. We haven't started doing our financial forecast for the next year. And if you are talking about the second half, we don't have any plan to revise our financial forecast.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [7]

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And in terms of 5G, we're seeing it as a long-term play. So the 5G license will be a 20-year license. So we're going to be methodical about it, and -- we're going to be methodical about it.

In terms of bidding, we're going to consider that confidential information.

And then in terms of 5G business model, I would -- like we communicated before, we will be working with sort of services to build end-to-end integrated solutions on top of vertical -- on top of horizontal connectivity to the product.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [8]

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So you will start from the IoT, and then we will go to other segment, right?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [9]

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So IoT is definitely a key piece of the puzzle in terms of 5G service offerings. And -- but it depends on the vertical that you're going after. So like we communicated before, we're -- with 5G, we're going after verticals such as industry use, medical use, retail use, Smart City and et cetera. So in a lot of these different verticals, we see -- there will be a need to use -- to integrate IoT products who operate the best set of solutions for these industry users.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [10]

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Okay. I see. Sorry, just one follow-up question. And what are the key points for the cable business in the second half of the year? Yes, because -- well, any chance we'll -- for growth in the second half?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [11]

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I think the overall market is still facing headwind in terms of subscriber retention, but we will continue to push our DTV and broadband services. Right now the penetration rate of these 2 services are still below 50%. So we see a lot of upside in terms of signing up our customers to these services.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [12]

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But it will -- this segment will -- I mean will the price competition this segment will fierce?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [13]

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We don't see price competition to intensify in the second half of the year, but these things are hard to say.

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Operator [14]

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Next we have a follow-up question from Neale Anderson with HSBC Hong Kong.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [15]

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Sorry, I just have one more. It relates to Slide 7 on momo's dominance in B2C market. Could you give us your view on how sustainable you think that dominance is? And presumably, those other companies, they're not doing so well. They're trying to turn their performance around. Is it feasible to take share from momo? Or do you believe it's more sustainable than that?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [16]

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Well, so I think like we communicated before, our e-commerce has gotten to a point where the competition is really in the warehouse build-out. And right now, if you look at where momo is, it's actually in a leading position with a big gap compared to other players.

So we see that in the short run, there is not going to be any possibility for any other players to catch up to momo. Of course, in the mid- to long run, a lot of things can happen, but at least for the next 12 to 24 months, we don't see any threats to momo's dominance.

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Operator [17]

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Our next question comes from Billy Lee with Crédit Suisse in Hong Kong.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [18]

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I have a question for -- a question on 5G. May I know what's the latest time line, based on your expectation that when the spectrum will be auctioned? And then what time -- what -- when will -- where are you seeing commercialization of 5G?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [19]

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Okay. Based on to the best of our knowledge, right now the government is planning on hosting the auction in December of this year. Chances are it will be completed early next year. Once it's completed then what -- some of the spectrums are trickier, but if you -- if, say a telecom company wins the sort of a middle section of the spectrum, which is the cleaner one, then they can immediately start building out. So it will probably take another 6 months-ish from there to the commercial launch.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [20]

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Okay. I see. And also another follow-up question. I know you earlier mentioned that it's confidential to mention about bidding strategy, but any expectation on the landscape in terms of the competition based on what you're feeling?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [21]

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It's very hard to predict, but right now it looks like 5G -- the first wave of 5G deployment will be non-standalone, which means that chances are it's the existing players.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [22]

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Okay. Got it, got it. And other question, one more. On -- did we have guidance for dividend payout for this year and probably even next year?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [23]

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Well, what we can say is we are always very committed to a stable dividend policy. As to what the definition of stable means, it's up to the Board to decide every April.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [24]

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Okay. But does it -- so it could mean absolutely or as percentage of earnings, you mean?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [25]

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It's hard to tell. It's to be decided by the Board every April.

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Operator [26]

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(Operator Instructions) And we have a follow-up question from Mr. Billy Lee.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [27]

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Yes. It's me again, sorry. Another question on the telecom competition space. So I know you mentioned the competition revenue and the overall market has been stabilized. I want to know is -- on the ground in CE, in actually -- or is it more like a really stabilized competition between the big three and a small player or are the smaller guys becoming more aggressive? And how are the other bigger three players responding to such a stabilized market?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [28]

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Well, as so we presented in a slide. So the smaller players have been -- still have been sort of competing pretty hard, but we're seeing their strategies becoming less effective. In terms of the big three, I think we're not seeing intensified competition.

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Operator [29]

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(Operator Instructions)

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [30]

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So if there is no more questions...

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Operator [31]

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Sorry, Mr. Lin, we do have another follow-up question. And also that is from Mr. Billy Lee.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [32]

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Yes. Sorry, another question. I saw the growth of the new business such as IoT and cloud solution, information security are doing pretty well. Could you disclose what's the revenue amount there of these categories?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [33]

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So it's -- these are all below 10% single-digit percentage.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [34]

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Of the total revenue you mean?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [35]

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Yes.

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Operator [36]

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(Operator Instructions) And we have a follow-up question -- and another question comes from Ms. Amber Lee with Yuanta

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Yufang Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [37]

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Just a question to follow up. So on the 5G infrastructure investment, you mentioned that the commercialization will be coming in early next year. When can we see the spike in investment amount? Is it going to be next year or the year after?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [38]

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You mean CapEx amount, or what?

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

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Yes.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [40]

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The CapEx for next year will be released in January or February next year. We haven't completed our forecast for the next year.

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Operator [41]

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(Operator Instructions) And next we have a question from Mr. Jack Hsu with SinoPac.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [42]

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The first question is -- well, I just want to -- I'm interested for the roaming, (inaudible) roaming business we have cooperated with. And the tools model, our peers, but it seems the industry CEOs agree the roaming trend for the -- for our cooperation with the (inaudible). But -so how is your company's viewpoint for the roaming, especially for the roaming maybe in the 5G? So what's our viewpoint? And with this kind of business, how much of the profit we can generate from these kind of business?

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [43]

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So in terms of roaming, since the revision of the Telecom Management Act, the NCC has been supportive of this type of collaboration between telecom companies. So we will continue to look to -- look for opportunities to grow this business. In terms of profits on that, Rosie?

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [44]

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So I think the roaming agreement or roaming cooperation with smaller players are just commercial negotiations. So it's hard to predict the profit at this stage. And also the agreement to be signed will be kept in strict confidence. So I cannot share with you the profits of the roaming.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [45]

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Okay. So I'm interested for how -- what kind of profit we can get is from the speed or service or will we -- to provide a success by roaming. So I'm interested for the profit, what kind of the profit can generated by the roaming business? So it's only the, I think, the roaming fee? Or we can also -- we also can sell our services or our content by the roaming.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [46]

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Just the roaming charge.

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Operator [47]

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(Operator Instructions) Excuse me, Mr. Lin, there seems to be no further question at this point in time.

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Zhichen Lin, Taiwan Mobile Co., Ltd. - President, Acting Chief Business Officer & Director [48]

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All right. Thank you, everyone, for joining today's investor conference. You all have a good evening.

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Rosie Yu, Taiwan Mobile Co., Ltd. - Executive VP of Finance and Administration, CFO & Company Secretary [49]

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Thank you. Bye.

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Operator [50]

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Thank you for your participation. This concludes the conference.