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Edited Transcript of 4904.TW earnings conference call or presentation 19-Feb-20 8:00am GMT

Q4 2019 Far EasTone Telecommunications Co Ltd Earnings Call

Taipei Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Far EasTone Telecommunications Co Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chee Ching

Far EasTone Telecommunications Co., Ltd. - President

* Gary Lai

Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance

* Sherman Lee

Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO

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Conference Call Participants

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* Billy Lee

Crédit Suisse AG, Research Division - Equity Research Analyst

* Gary Yu

Morgan Stanley, Research Division - Executive Director

* Jack Hsu

SinoPac Securities Investment Service, Research Division - Analyst

* Neale Anderson

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

* Peter Milliken

Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team

* Danny Chu

BofA Merrill Lynch, Research Division - Director

* Amber Lee

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

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Presentation

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Operator [1]

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Welcome, everyone, to Far EasTone's 2019 Fourth Quarter Earnings Conference call. (Operator Instructions) For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.fareastone.com.tw under the Investor Relations section.

And now I would like to introduce Mr. Gary Lai, the IR Officer. Gary, please begin.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [2]

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Good afternoon, everyone. Thank you to participate FET's Fourth Quarter 2019 Results Conference call. Today, our President, Chee; and CFO, Sherman, both join the call with us. Finally, a reminder to everyone, kindly pay attention to our Safe Harbor Statement in the first page of the presentation. Let me pass to Chee. Thank you.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [3]

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Okay. Thank you, Gary. Good afternoon, everyone. Thank you for coming, and I'd like to share our fourth quarter results and

(technical difficulty)

of 2019 and then Far EasTone's performance with you all.

And then if you turn to Slide 3 -- okay, in terms of the mobile market in Taiwan, we are glad to report that, in terms of the subscribers, the number of subscribers, the growth has stabilized. And then Far EasTone has continued to grow in our postpaid numbers. As a matter of fact, since 2014, our postpaid subscribers have been declining slightly. And in 2019, the tide has turned. So this is the first time we are going up again and for 5 quarters in a row, that our postpaid customers have been growing. So which is a great news, okay?

On the other hand, in terms of the NP, or we call portal number -- number portability -- mobile number portability, MNP, the market has cooled down, which is good. And then in terms of our postpaid churn, the rate -- we kept hitting the record low. And actually, just last month, the January number, I also like to share that with you here as well, that it is now like a 1.26%. So that also helped our market to stabilize and then also the competition to cool down a little bit.

And then in terms of the operational performance, we are glad that we are leading our peers in terms of ARPU in both the postpaid ARPU and also the blended ARPU. Especially for the postpaid, the lead is a lot more obvious than the blended.

And then in terms of our customer satisfaction, according to the third-party survey that our customer satisfaction has continued to go up, and then we will continue to do better and work better with our network and then continue to optimize our network performance and to optimize our users' experience.

All right. And then as you know, we have been focusing our new economy, right? As we want to grow out of the traditional telecom and to grow into a Telecom+, and then so this transformation relies a lot on how we are doing in our new economy area. And then so for 5 years in a row, if you look at the growth in the new economy area, and then last year we achieved about 13% and then we are looking to expand to about 15% this year. And of course, this is a -- percentage is always the denominator is not a fixed number, so it could fluctuate a little bit depending on how we are doing in the other business. So we use this not necessary as a KPI, just directional -- directionally, and then we will continue to grow this.

Especially, on the right-hand side, if you see, we give several examples that they are more in the enterprise area. So our cloud service has grown more than 4.5x than the year before. And then our IoT business is also doing very well, and it's almost 3.5x more than the year before.

And then in terms of the security and then also the system integration, the SI, the typical ICT kind of project, they are also in double-digit growth. So we are very pleased with some -- especially in the enterprise area how our new economy has been booming. Okay?

Okay. And in terms of our bottom line, we have exceeded our Board target or our guidance by 3%. So in terms of the guidance achievement, we are happy with how we were doing last year.

Okay. With that, I'll pass it on to Sherman for our financial performance details.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [4]

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Okay. Thank you, Chee. Now we are on Page 9. And we look at last year's quarter-by-quarter EBITDA and margin rate, and it has been stabilized as -- from the year beginning $7.47 billion to the fourth quarter 70 -- $7.09 billion and the net income ranging from the first quarter of $2.2 billion to the last quarter, $2.134 billion.

And Page 10, the -- so the overall -- full year performance, if we look at total revenue, which is $83.866 billion, we've missed the guidance by just 1%. But we have a very stringent operating expense control, so our operating expense is $14.831 billion, which is 4% lower than our guidance. And we achieved a better than guidance 1%, the EBITDA is $29.152 billion. And the net income is better than guidance, is $8.735 billion -- and our EPS is $2.68, $0.08 better than the guidance.

And next page, Page 11. Consolidated balance sheet. Our cash and cash equivalents on hand, $7.8 billion, which is very good. And our net debt is $26.526 billion. And shareholders' equity is $70.606 billion. And our net debt-to-EBITDA ratio is a very healthy 1.04x. And free cash flow last year is $11.662 billion. And the cash-based CapEx last year is $6.218 billion. So that is our financial recap for 2019.

And then turn to Page 13 on the 2020 guidance. So year 2020, we expect to grow the revenue by 3.4% higher than 2019, reaching $86.759 billion. The operating expense, because of the 5G and we're doing all these 5G-related preparation and programs and investment, so our operating expense will grow by 10.5% to $16.391 billion. And the EBITDA will be $27.699 billion, which is -- will be 5% lower than 2019. The net income will be $8.016 billion, and the EPS will be $2.46, which will be 8.2% lower than 2019.

And the next page, the CapEx guidance. Because of 5G kicks in, our CapEx for 2020 will be $10.2 billion, which exclude our IDC onetime spending on 2020 at Banqiao and about 60% of that will be related to 5G.

And then the next page, Page 15, the dividend distribution for 2019. And we'll be paying -- given our EPS $2.68, and then we look at the long-term perspective of financial performance for 2020 and years to come, and we decided to propose -- distribute $3.25 as a dividend for 2018 -- no, 2019. And this, of course, is subject to general shareholders' approval.

And that concludes my section, and return to Chee.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [5]

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All right. In terms of the business outlook, first of all, our strategy for corporate since 2019 have been in 3 areas, right? We want to stay fit -- that is continue to scrub our costs -- and then reduce our operational expenses. And then on the other hand, we want to continue to transform into those new technology: Big Data, AI, IoT and cloud-enabled digital services. So in addition to the traditional telecom service that we want to provide more value-added services to our subscribers and to our consumers. And then on the other hand, and then in those areas like we call them the new economy, we want to grow the new economy value and then the revenue. And then now even with telecom, with the 5G that is going to come out this year, we do expect the revenue in the telecom should start to grow again. And then we are expecting some uplift from the 5G technology just because they will provide much bigger and better bandwidth and then services as well. So all in all, right, we continue the same strategy.

And in terms of the transformation, what I have put here, this has been several areas that last year we started doing. So like we are monetizing our IT best practices and then we use them in our enterprise solutions, like the security systems and the fraud detection, things like that. And then we wanted to build our software development capabilities, continue to strengthen that, so we would start in-sourcing more of the newer or strategic development work and instead of outsourcing it. So that is also ongoing. And then we continue to focus or to train our employees for the 4 technologies kind of capabilities and knowledge, and that is in the big data, AI, IoT area and, of course, cloud. And last year, we actually have done very well in terms of getting our folks certified. And then we also obtained the managed service provider certificate from AWS that was like one of the few worldwide.

And then we have formed strategic partnership with quite a few the world brand names such as Microsoft, AWS. And then in the -- we had a couple of AI Hackathons. We put them out there because, usually, you wouldn't expect that from a traditional telecom business. But then our team has been very into the new technology and then AI becomes kind of like for everyone in Far EasTone. So this is not only for the technology area, for IT or for our transformation office, but then the business people also share the interest, because they really have the real business problems or pain points that where AI technology can help resolve. So we had 2 very successful hackathons, one is done with Microsoft platform and the other is with AWS, both were very successful. We have very -- we had quite a few very interesting scenarios, and then some of them are actually being implemented and used in our internal and also helping with the customer satisfaction.

Now last but not least is the 5G excellence, right? So we have a very strong network team. And then we continue to build on our 4G technology and the 4G quality network that we have put out there. And then I think everybody last month or so has been reading 5G almost every day because of the auction. Yes, when we were -- we were happy that we were able to up in 80 megahertz 5G, the 3.5G spectrum. And that will help us to continue our efforts in the 5G area. We were still ahead in terms of -- especially in the enterprise area, we do see that it will take some time for newer services that are specific to 5G, to really come out or some people call them, I guess, killer applications. That is more for the consumer.

But even with that, we will see with the 4K and the 8K resolution type of streaming and then also for the AR/VR or cloud gaming. So there are already quite a few new consumer-focused services that are -- that will be available to come with 5G. But then on the other hand, for the enterprise, right? So 5G can provide a lot more in this area that can help the industry to automate even more or to upgrade. And then so we do see a lot of opportunities in the 5G area with enterprise. As people know that Far EasTone is part of Far EasTone conglomerate, the Far Eastern Group, so we have many traditional industry areas in our own group that can benefit from this technology. So we also work with them in the POCs and all that.

But in general, we can summarize this in like 8 pictures that that is what Far EasTone has been leading. And then like we had the first 5G last setup a couple of years ago, and then we were the first one to have a 5G plus the AI industrial application, right? We were using AI to detect the fabric flaws or the defects. And then we were also the first one that proposed the 4 private network model that could be achieved by using the macro network and then instead of having dedicated spectrum. And then not only that, we also have done -- we are doing POCs. And then we already have signed a big contract for the first enterprise network with 5G. And then we also have the first live video show with 5G and back in September.

And then last year party, we sponsored the Taipei City, [with its] first 5G video show as well. And then we had an open testing field that is supporting the Taipei City, and in the Neihu Park. And then we have the first 5G experiment in the retail store with FamilyMart. And then the one I was talking about, the first 5G for the semiconductor industry for this private network or enterprise network was with MediaTek. And of course, we introduced this first 5G telediagnosis solution that we are working with 3 hospitals. And we are signing some projects with some of the local governments, to push for getting the medical resources, special medical resources into the areas that were not as reached or as -- like in urban areas.

So we are doing a lot of the 5G work almost like in all avenues that you could think of. And then so we are very hopeful with the 5G spectrum that we have obtained and then we have enough to do a really, really good job with 5G services for both consumers and enterprise. In the last year, I have to say, we have got a lot of recognitions and awards, and I wouldn't bore you with the 2 pages long, but we have there just for your reference.

And then finally, I'd like to talk about our 2020 priorities. Of course, deploy the 5G network is our #1 priority, and then we are on target. And then we are looking for in 3 -- third quarter to have the business launch. And then this won't be end of third quarter, but it will be in the third quarter. And then in the consumer BU area, right, the 3 priorities we have set for ourselves. One is to develop the 5G content services that will be attractive for the 5G adoption. And then of course, some of this we have partners that we work with. We don't need to start from scratch. And then we also want to expand our loyal customer base and grow the total customer value contribution.

And then we want to grow our e-commerce and then mobile financial services and new digital services in these areas. And this is continue our transformation journey to set us beyond the telecom -- traditional telecom services. We will continue to do better with these new services as well.

And then on the enterprise BU part, we will grow -- we'll continue to grow new economy revenue. And then -- but then we will also look at -- to improve the EBITDA. And last year, we have done a tremendous job. Our enterprise team really has done a great job in getting -- we set very high revenue target for them, and they were really short by just 0.5%. But then that was really tremendous efforts on their part, and I was very proud of them. And then -- so we have established our name in this area now and then we will be even more selective and then when it comes to the margin and when it comes to the EBITDA. At the same time, since we established a transformation office, one main purpose of that office is to provide home solution, right? Or added value to the solutions that our enterprise provided to our enterprise customers. So we will continue to do that and then so we can improve our FET added value and margin in these enterprise solutions we offer.

And then we will upgrade and up-sell the telecom business solutions with new technologies. So many of our clients in the telecom area, they are also looking to do some upgrade or more automation. And so this is where we have been focusing on the Big Data, AI and IoT technology and the capabilities we have been building that will come handy. So they already are our traditional telecom clients and now we can help them with more, okay? And so this is one of the 3 priorities for our enterprise view as well.

And then we have our omnichannel that supports both enterprise and the consumers. But then for this year, because we are going to launch 5G, so we are looking at how to optimize our channels in order to drive higher 5G adoption, okay? And then of course, we will continue to develop, retain and recruit talent. This is really -- the knowledge is power, and then the people are a company's best assets, most valuable assets, so people are important. And there's competition. So we want to make sure we retain talents as well. Okay.

And last but not least, we need to control our costs. And then so we -- Sherman did show that we have higher than last year operating costs that we are expecting. However, as the President of the company, and I can tell you that we'll continue to scrub that, so I believe we will do better than what is shown to you. But then, this is one of our top priorities. So across-the-board, across the company, we'll continue to improve our bottom line. We'll control our costs.

Okay. With that, I think that's the last slide I have.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [6]

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Let's start the Q&A session, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from Neale Anderson of HSBC.

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

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I have 2 questions, please. The first one relates to the dividend and particularly how you think about that going forward. And how you make your recommendations to the Board. So you've cut your recommendation for this year, but still a payout ratio above 100%. So really, my question is, is that how we should think about the Far EasTone dividend from here? Is it your line capacity (technical difficulty) but it's been closely linked to earnings from now on? Is that how you think we should understand it?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [3]

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Okay. Well, first of all, for 3.25, our payout ratio is 120, not just 1 -- not just 100%, it's 121%. And it is adjusted down a little bit from last year, and last year was extremely high, which was 130%. And then if you look at the history of our payout, it has been like over 100%. So we maintain a generous policy, payout policy. And then -- but then also for this year, I think this is based on what we have at the beginning the reserved earnings, right, that we do not distribute, plus we have 2.68. So that adds up to about 3.2 or so. And then so we just figured 3.25 is a reasonable number. And then we adjusted that from 130% that was too high last year to 121%. So I think we will continue to maintain the generous payout policy.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [4]

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Understood. That's very helpful. The second question is really a clarification. It relates to Slide 13, Sherman, which you went through. I'm probably being daft, but I'm confused by the operating expenses, $14.8 billion to $16.4 billion, what does that refer to exactly?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [5]

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Okay. Basically, because of the 5G program, so we are increasing our spending on 5G preparation and related subsidies and other things, I mean because we want to have a good start on 5G.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [6]

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And some of the accounting treatment. So some of the subsidy we paid last year got deferred, right? We were very aggressive last year to get more the subscribers for the total value. And then as a result, we actually paid quite a bit of subsidy. But then because of accounting treatment change, so some of that actually deferred or reflected in this year. So there's some accumulative kind of effect there. But then on the other hand, because of 5G, we do have more expenses planned because the -- launching the 5G. So that kind of adds up to the difference. But then, we will be able to continue to scrub that.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [7]

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Okay. So what is the number referred to? Because I've got OpEx before D&A at about $55 billion, so what was the $14.831 billion? What constitutes that?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [8]

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Sorry, give us a second. We'll get back to you off-line for the detailed numbers, okay? It's all based on our financial report. Is that okay, Neale?

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [9]

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Yes. Sorry, I was being added and removed. So I'll catch up with you after the call then to clarify.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [10]

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Sure, sure.

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Operator [11]

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And the next question is coming from Peter Milliken of Deutsche Bank.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [12]

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I have 2 questions. I'll ask them one at a time. First of all, just on the DPS. I mean you guys have been very generous for a long time and you have to be congratulated for that. But it gets to the point where because industry earnings have been coming down so much, you get into this uncomfortable position. Now you have cut your DPS at 121%. It's still high, and presumably you need to start -- you need to think about putting money aside for the end of the decade when the next spectrum auction comes around to fund that. So are you thinking that you're going to grow into your DPS? [Do] just earnings get, say, 20% higher in the coming 5 years and solve that problem? Or do you think spectrum is going to get cheaper? Or is there something else that I'm maybe misunderstanding? I'll just start with that one.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [13]

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Okay. Well, so I think if you look at the history of Far EasTone's payout, right? So since 2011, that we have been paying more than 100%. So between -- not counting last year's 130%, it has been like between 104% to 113%. So I think that's a reasonable enough range. And then like I said last year, it was really, really high and then we adjusted down. And then of course, with our auction, the most expensive bidding in history for us, so that definitely is a factor. And then now if you're asking, are we going to continue to be at 120%, so I think from our EPS forecast for next year, and that is yet to be seen. But I would agree, I think 120%, especially if we compare with our peers, that is on the high side. That is on the high side.

Now in terms of the -- another spectrum coming up, well, that is really still in the air. And then given we have -- I think we have a very good position in 5G. Not only we got 3.5, we also have [28 G]. So for now, I really think we are more than sufficient. And so for the other spectrum planning, I really don't see that too soon.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [14]

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Right. Okay. And then my second question is, you talked earlier, you gave a great presentation about what you're doing in sort of new digital initiatives, that was fantastic. One thing you mentioned was consumer demand in 5G for 4K, 8K, VR, cloud gaming and I agree with that. My question is, can you monetize that extra data throughput given the existing pricing plans, which are heavily (inaudible) [based]?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [15]

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So the existing pricing that you're referring to 4G. So for 5G, there will be different pricing plans. That's for sure. And I think everybody knows, right, Taiwan has one of the cheapest, if not the cheapest 4G ARPU or a plan that's available worldwide. So that was due to the 4 99 a year ago, right? So -- and then with the price that carriers paid the government for acquiring the 5G spectrum, I think the public should expect that the price should go up even at a reasonable bidding price, if that's what we paid. With what 5G could provide, if the users sign on to the 5G program, and then the higher price should be expected and then that is also our expectation as well.

So I do plan on monetize, but then the question is always to what extent? And also what our competitors will do? And we do know that we have one of the leading companies, right? They are not exactly like a privately owned. So they could have a little bit different agenda or different pricing strategy. And then to be honest, they are the price -- they are the market setter. So they would -- how the market price will go will have a lot to do with what they will do. And then hopefully, if everybody is in their right sense, right, I think it's just like the government said, when they wouldn't interfere with the bidding, they say, they were respecting the market mechanism.

And then when it comes to price setting, it should also be respected as well. It doesn't make any sense to let the cost go up, right? And then without any interference, but then on the other hand, you've got capped on your price, that wouldn't be a fair market competition at all. But then that is something beyond my control. But then if you ask me, from Far EasTone's perspective, I do expect the 5G price to be higher than 4G. And anybody in their right mind should expect that.

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Peter Milliken, Deutsche Bank AG, Research Division - Head of Asia-Pacific Telecom Research Team [16]

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Yes. And this is a great point about whether the government controls one price and not the other, because with the 4G spectrum, they were holding you back on 3G pricing, basically mandating that unlimited pricing had to be maintained. Are you hearing that for 4G pricing and the lead up to the 5G rollout? Or that has not been a subject discussed yet?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [17]

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We haven't heard anything like that. But then I think on the contrary, right, because I talked about the accepted bidding price. So I think the government is considering how they could compensate us for that, and then in terms of some credit or tax break, things like that. So if that does happen, and I hope that will happen, and then we should all get some relief. For those of us that paid a lot, we should get some relief.

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Operator [18]

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And next, we'll have Danny Chu of Bank of America.

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Danny Chu, BofA Merrill Lynch, Research Division - Director [19]

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Two quick questions. First is, in your presentation you mentioned that the 5G as well as the enterprise application. So far, based on your discussion with all the business partners, even though I understand probably the 5G revenue from enterprise is going to be immaterial this year, but if you have to name 1 or 2 specific example, which are the specific application for the enterprise customer that you think will carry the biggest revenue potential going forward? That's question number one.

And question number 2 is also [a compliment] on the back of the comments that you just made on the 5G tariffs, that you expect 5G tariffs to be higher than 4G tariffs given the price you pay for the spectrum. But do you think, like, in case if the major, major operator set the 5G tariffs at a level simply just to drive up 5G adoption rate, should we expect Far EasTone to simply to match it just because we also want to have -- get the customer regardless of the tariff level?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [20]

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Danny, sorry, we didn't hear your second question very clearly.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [21]

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But we could answer your first question first, how about that? So you're asking about the type of applications that we could use in enterprise, right? So for -- it's really more like a private network, like a dedicated network to a site, and then this is actually in the manufacturing area that is quite useful. And like I mentioned, we have -- we already have signed a contract, right, with MediaTek. But then it's really more for his, I would say, his suppliers or his downstream, right?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [22]

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Yes.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [23]

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Yes, his testing partners, right? The packaging and testing partners, where they need to communicate the data back and forth and all of that, and then they need to have very reliable and low latency kind of communication. So we -- this is like one size doesn't fit all. So every such scenario, our technical team actually needs to work with the business customers and see what their needs are. And then right away, we mentioned there were 4 models, right, and then so which one and maybe a combination of 2 that will suit them. And then -- but then we -- right now, we have like a double-digit POCs going on. And then we already have the first one that's signed. And then -- so we expect more. So definitely, there are many useful scenarios, especially in the manufacturing area.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [24]

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And don't forget, we have Far Eastern Group to support. We work with them with many cases as well.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [25]

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Yes, the POCs don't even count our own group. Yes, so these are all external companies.

Okay. And then if you would repeat your second question. I got distracted so -- and then I think I caught the answer, but if you would just abbreviate it for me again and I would appreciate it. I'll try to answer.

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Danny Chu, BofA Merrill Lynch, Research Division - Director [26]

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Yes. Sure. Actually, just a follow-up through the comments that you just made. On the contract that you signed with MediaTek, can you share with us how do you charge MediaTek? Is it a lump-sum contracting? Can you share any...

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [27]

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No, no, I think you should know better. That is really not something for me to share. And I already mentioned the client, so I think that's all.

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Danny Chu, BofA Merrill Lynch, Research Division - Director [28]

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Okay. But back to the follow-up question that I was asking is in case if the major operator set the 5G tariffs at a level simply just to drive up the adoption rate, even though you mentioned earlier that you would want 5G tariffs to be higher than 4G tariffs, because of the price you pay for the spectrum. Are we, Far EasTone going to just match whatever the tariff set by the major operators, simply just to compete for market share?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [29]

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Well, I think it's really -- when it comes to pricing and all that, it's more complicated than that. Even we have tariffs for 4G. But then through different kind of campaigns and or promotions, there are just like mixes, right, and also the subsidy, what we will provide. So it's really a multifacet question. So -- or it's not just one or the other. So -- and I think every telco will have a different strategy. And we are not supposed to have the same strategy. That would be like -- that will not allow it, so if we are actually trying to cooperating in any way.

So I think everybody will have a different strategy, and then some may want to drive our -- the adoption and some may take it slowly. Eventually, it's like what are you looking for, your bottom line or your P times Q? You want a Q or you want a P? But eventually, its P times Q that everybody should be looking at. So I think it really depends. And I don't have one answer or the other for you at this point. Sorry.

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Operator [30]

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And the next one is coming from Gary Yu of Morgan Stanley.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [31]

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I have 3 questions also. The first one relates to your 2020 guidance. It seems to me that you're looking for a majority of the revenue growth coming from the enterprise or what you call the business even in 2020?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [32]

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No, if I may correct you, that's not the case. Because for enterprise, this year we would expect them to be at about -- they reached 20% for the full enterprise revenue. In 2019, they actually grew to account for 20% of the total revenue. So still, it is the smaller part of the whole pie that we have. So we do like to see more revenue coming out of the new economy, which is -- covers both enterprise and consumers. But then in order for them to really change that percentage, it will take time. It's not 1 year. So they won't be the major one. But then anything helps, okay? If it were to continue.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [33]

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So the 3.4% revenue growth probably also assumes the consumer factor resume back to positive growth in 2020?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [34]

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Yes, yes, it's contribution from both. Yes.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [35]

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Okay. And the net income guidance of 8.2% decline, how much of additional kind of spectrum amortization we have already incorporated in this guidance?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [36]

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My CFO has the details to share.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [37]

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Yes. And we expect to have around $600 million depreciation, amortization -- sorry, amortization in year 2020 because of the spectrum.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [38]

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Okay. And because you are planning to launch service in third quarter, so that's about the timing we should expect amortization to start? Is it correct?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [39]

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Correct. Correct.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [40]

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Okay. So my second question relates to CapEx, and more specifically on 5G CapEx. I understand that the full year CapEx guidance is at around $10 billion. How should we look at what Far EasTone is trying to achieve with the $10 billion CapEx budget? Are we doing more kind of outdoor versus indoor, metropolitan area versus kind of mass coverage? And a related question to that is, when should we expect the CapEx to -- start to kind of decline going forward?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [41]

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Well, just like 4G, right, it takes a few years to build to the network size and a coverage that is desirable. And then 5G is built on top of 4G, and we don't expect that the whole work will be done in 1 or 2 years. So we will start -- as soon as we're going to deploy the service, so we want to make sure we have some reasonable coverage. And then it's not restricted to one area or the other, we do look at the current nationwide. And then next year, it should have -- I would expect, because next year it's a full year, right? So we have more time. So in terms of the -- our capacity to build more of the network, it will be more. So the capital spending probably will be a little bit more than what we would this year. And then they should taper off a little bit. So 2 to 3 years or 3, even 4.

And then it also depends on how the market react, right, to our 5G services. So if the consumer -- the majority of the consumers are still kind of cold to 5G, and then we may slow down. So this is all -- we want to see after we launch this year and then we can adjust our strategy for next year. It doesn't need to be set in concrete.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [42]

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Okay. And my last question relates back to your dividend. And it seems to me that according to management comment we think that the 120% payout is probably the right payout for us going forward. Given our EPS guidance is going to fall in 2020, and if we try to kind of incorporate the full year amortization beyond 2020, 2021, should we -- should our base be at a similar kind of 8% decline in dividend next year if we keep 120% payout?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [43]

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I wouldn't say that. I wouldn't say that, and I really can't. I don't think so.

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Gary Yu, Morgan Stanley, Research Division - Executive Director [44]

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Okay. And from a management perspective, do we tend to look at dividend per share or payout or both?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [45]

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We look at both. We look at both.

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Operator [46]

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(Operator Instructions) And the next question is coming from Billy Lee of Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [47]

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Yes. I wanted to ask about the second round auction of 5G spectrum auction, which are just 2 days away from now. So I want to know what is the current progress in negotiation with other operators regarding the location? And what -- any update would be appreciated.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [48]

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So I -- well, I can tell you there is no agreement that has been reached. So still 2 days. And then more -- anything can happen. But then right at this moment, I can tell you, there's no agreement that has been reached yet, unfortunately.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [49]

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I see. Can I follow up with you, that what do you think is the biggest hurdle for good deal to come out from the negotiation?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [50]

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I think there are different perspectives. Let me tell you this. And then I think every -- some company has different style, in terms of how or whether they would work with others. So some could be more like they would like to be the lone wolf and then they just don't want to collaborate, whether you have agreements or not. So -- but then, it's just 4 different companies and they are competing with one another, so reaching an agreement, it is a hard thing to do. That's all I could say. But then this whole thing hasn't been easy, has it?

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [51]

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Okay. Got it. And then I have another small question regarding the CapEx. I noticed that in your guidance of 2020 CapEx, you emphasized you have any -- haven't included the onetime IDC expense. How much is that? And what is that exactly?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [52]

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Yes, that would be $2 billion.

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Operator [53]

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And the next one is coming from Jack Hsu of SinoPac Securities.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [54]

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And I have 2 questions. My first question is about, could you give us some color about the financial plan, because the company needs more cash to pay for the spectrum and also need money to pay the dividend. So could you give us about some colors about the financial plan for the future development? This is my first question.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [55]

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Okay. I think regarding the financing plan, right now, I think after this auction, our debt ratio will reach around the range of 60%. And that is still at the median range among Asian operators. So that is still acceptable for telecom operators in this region. And based on the expected CapEx and other spending on 5G in the next 2 years, I think we'll be fine. I mean our financial standing, our -- I mean our credit capability with our banks are still doing okay.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [56]

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Yes, we are still pretty close to the 60% where we are.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [57]

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So that means we will -- maybe we will take loan from banks in the quarter?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [58]

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Yes.

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [59]

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So my other question is, could you give -- could you elaborate on some details about -- between the Far EasTone and our enterprise customers about the development of the 5G, especially, I mean which kind of the method or kind of situation will go first when we develop the 5G?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [60]

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Are you -- I'm sorry. So are you asking like which vertical? So are -- you are asking -- what do you mean, what goes first?

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Jack Hsu, SinoPac Securities Investment Service, Research Division - Analyst [61]

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Yes. So I mean because there are many methods between Far EasTone and the enterprise. Some can -- they can -- well, I mean they can just maybe they rent the Far EasTone spectrum, and another kind is they can cooperate with Far EasTone. Maybe also they will to -- also sponsor some payment for the spectrum. I mean there's different kind of ways to develop 5G in the future. So in the first -- right now, in the first period of time. So which kind of the method would be the -- our priorities?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [62]

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Oh, I see. I see. No, so for the enterprise clients that we have right now, they are not looking into building the communication network themselves. So we are their total solution vendor. And then we will work with them and with their other vendors that may help with their domain-specific implementation, whatever. But then we are the -- their telecommunication solution provider. So then, we own the spectrum, we use the spectrum and then we design the networking solution for them. And then -- so that's the various deals or the POCs we've been working on. But then, of course, to your point, right, the

(technical difficulty)

some customer may look -- looking to arrange or like use like MVNO or something like that. That could happen, but then that certainly isn't our priority and isn't something we have working on right now.

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Operator [63]

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And the next question is coming from Amber Lee of Yuanta.

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Amber Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [64]

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Just to clarify, for amortization, its $600 million for this year, is that right?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [65]

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$600 million plus. $600 million to $700 million. Yes.

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Amber Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [66]

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$600 million to $700 million. So -- because your spectrum cost is about $41 billion in the first stage. And if we divide that by 20 years, it's about $2 billion per year, right? So at $600 million and $700 million, sits at about 30%, 35% of that number. It sounds like we're assuming that 5G commercialization to start more toward the middle or the end of the third quarter. Is it the right way to look at this number?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [67]

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Well, as I stated, we are looking to launch the 5G business in third quarter. So the number we gave you is in line with our expectations. Yes. So did I answer your question?

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Amber Lee, Yuanta Securities Investment Consulting Co., Ltd. - Research Analyst [68]

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Yes. Yes. And I guess the amortization numbers somewhat factor in the second stage auction result? Or has it not?

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [69]

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Yes. It's all included.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [70]

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It's a rough number. So -- and then because the second stage is not known yet, so we just use a rough number. But then I think it's close enough.

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Operator [71]

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And the next question is coming from Billy Lee of Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [72]

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Sorry, I've got 2 more questions. The first one, yes, but the first one is that -- so in your revenue guidance for 2020, you talk about the 4%, it's a combination of enterprise customer and consumer side of business growth. So I want to understand a little bit further on your expectation on the consumer side. So does that imply that you are expecting competition in the consumer mobile business side to see a stabilization after the disruption that we've seen in the past few years?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [73]

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Yes, I think you can say that. Because, after all, in the 5G business, we really just have 4 telcos, right, competing in 5G. And then even the -- our peer, the smallest one, right, and then they pay big dollars as well. So I think relatively speaking, they probably feel even more pain.

So the disruptive kind of behavior in the past, I would expect that to be more reserved in 5G. So -- and also as you can see from the 2019 data, the competition definitely has cooled down. And then we hope 5G with the big cost we all have paid for and everybody is just focused on fair and clean competition. And I think that will likely to be the case.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [74]

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Okay. Got it. And then the second question is a little bit further on the dividend. So yes, I know the 121% dividend payout is a pretty generous number. But considering your gearing level, it looks like it's actually acceptable for you guys to just borrow a little bit more to maintain the absolute dividend payment. How would you see that situation, like, that kind of balance between gearing and dividend?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [75]

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Between what and the dividend?

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [76]

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Between borrowing and maintaining absolute dividend payment?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [77]

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Yes, I think its fine, right? Even Apple with lots of cash, they borrow. And not to mention the interest rate here in Taiwan is very low. So -- and we do take into consideration our debt ratio and our cash flow and all that and also our shareholders, their interest, and then at the same time our ability to continue to invest. So this is all kind of considered. And then so we came up with 3.25, which we're fine. Yes, we are fine with, totally.

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Operator [78]

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(Operator Instructions) There are currently no questions. I'll pass the call back to Mr. Gary Lai. And Gary, please proceed.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [79]

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Okay. Thank you, everybody for attending our fourth quarter 2019 results conference call. See you next quarter.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [80]

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And if there are any more questions that didn't get answered or didn't get asked, we can always get some follow-up calls or visits, when people feel free to travel these days. So yes, we'll be here. So if you have questions that we didn't get to answer, please do not hesitate to contact us and contact Gary.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [81]

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Thank you very much.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [82]

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Thank you all.

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Sherman Lee, Far EasTone Telecommunications Co., Ltd. - Executive VP of Strategy & Finance & CFO [83]

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Bye-bye.

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Operator [84]

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Thank you. We thank you for your participation in Far EasTone's conference. There will be a webcast replay within an hour. Please visit www.fareastone.com.tw, under the Investor Relations section. You may now disconnect.