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Edited Transcript of 4904.TW earnings conference call or presentation 31-Jul-20 8:00am GMT

Q2 2020 Far EasTone Telecommunications Co Ltd Earnings Call

Taipei Jul 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Far EasTone Telecommunications Co Ltd earnings conference call or presentation Friday, July 31, 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

* Sharon Lin

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Conference Call Participants

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* Billy Lee

Crédit Suisse AG, Research Division - Equity Research Analyst

* James Wang

UBS Investment Bank, Research Division - Research Analyst

* Neale Anderson

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

* Sara Wang

Morgan Stanley, Research Division - Research Associate

* Wai Kit Chu

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Welcome, everyone, to Far EasTone's 2020 Second 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. And Gary, please begin.

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

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Hi. Thank you, everyone, who attend Far EasTone's second quarter results conference call. Our President, Chee; and newly appointed CFO, Sharon Lin, both join the call with us today.

Before Chee reads her presentation, please pay attention to our safe harbor statement in the first page of presentation.

Let me pass back to Chee. Please.

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

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Thank you, Gary. Good afternoon, ladies and gentlemen.

Before I start, I would like to introduce our new CFO, Sharon Lin. Sharon has been our Corporate Finance VP for many years and she has assisted 2 previous CFOs. So we are very happy that she is still with us, and then she is going to -- she's becoming our new CFO, actually, will be effective tomorrow. And so after I give you the business update, and we will have Sharon to provide you with more financial detail. Welcome, Sharon.

Okay. All right. So for the second quarter, the mobile market, as the whole world is impacted by the COVID-19, the market continues to be cold. And then so we look at the market mobile customers' number, it actually stayed pretty flat, if not decreased a little bit. And in terms of our postpaid customers for FET in particular, we have been on a growing trend for quite a few quarters now. And then -- but then even that, in the last quarter, the increase has definitely slowed down because this is just a very slow and cold market.

Okay. If you turn to Slide 4. And then in terms of the number of mobile number portability, this is also showing the number has been going down as well. So -- and it has a little bit lift in the second quarter '20. But then, if you look at -- on the other -- the flip side is in terms of the churn, that is also hitting the record lows. So I think that's the case for the whole market, not just FET in particular.

Okay. And then for our own operational performance line, we have -- I have combined it just to look at the first half because it's kind of for the continuity. But then when Sharon presents, she will have a breakdown in the second -- for the second quarter. So if you look at our ARPU for the first half, and FET continues to take the lead, and then we are at the TWD 708 for the postpaid. And then the blended is TWD 564.

And then in terms of our average customer satisfaction, the network quality, we are also better-positioned than the other operators. But of course, the competition is really keen. And also, with the 5G deployment, we'll continue to do our best to provide the best quality of the network service to our consumers.

Okay. The next slide talks about our new economy. So we are pleased with the results even given the pandemic impact. We are still seeing an encouraging growth. So for the -- compared with first half last year, our year-over-year growth is 26%. And then if you look at some of the major categories like the ICT, it accounts for more than half of our new economy revenue. Our first half is -- now has grown 53% year-over-year. And then the second quarter alone is also a double-digit 17%, to be exact, growth from the same period last year. And our IoT is almost 300% increase. And then also the cloud service and our mobile commerce. Even though it's small, but then it's also showing a double-digit growth as well. And I have to say, these are reflecting the revenue we have realized in the first 2 quarters. And then we do see some signs of a slowing down in some of the industries. So we'll be very careful watching the pipeline in terms of the future impact that may be reflected later and not this year, but certainly not in the first 2 quarters. But for what we have seen so far, it is still encouraging.

Okay. And then, so in terms of our revenue, we are definitely impacted by COVID-19, although compared with many other industries, we are still a lot better off. But still, with that, the first half revenue, we fell short by 6.5% of our Board target. However, we are able to manage our EPS and our EBITDA and our net income to exceed our Board target. So we are looking at, for the first half, the EPS is at TWD 1.35, and our guidance was TWD 1.28. So that's about 106% of achievement.

Okay. With that, I'm going to pass it to Sharon for the details on the second quarter financial performance.

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Sharon Lin, [4]

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Thank you, President Chee, and good afternoon, everyone. Now I will go through the financial performance for the first half.

Due to COVID-19 pandemic, total revenue for the Q2 is TWD 18.7 billion, slightly lower than Q1. With expected pacing control in the commission, subsidy and other OpEx, we delivered TWD 2.2 billion net income with 12% income margin which is the highest for the past 6 quarters.

Next page show our financial results comparing with our guidance. Total revenue for Q2 is TWD 18.7 billion. The achievement rate is 90%. Operating expense for Q2 is TWD 3.6 billion, which is 10% lower than our guidance. Total EBITDA is TWD 6.9 billion. Total net income is TWD 2.2 billion, which is 8% ahead our guidance. For the first half, net income is TWD 4.4 billion. The achievement rate is 106%. Earnings per share for the first half is TWD 1.35.

Next slide shows our some key financial indicators. Ending cash for the Q2 is TWD 15 billion. Total borrowing is TWD 75 billion. Net debt-to-EBITDA multiple is 2.09. Free cash flow for the first half is TWD 11 billion. Cash CapEx for the first half is TWD 2.5 billion.

That's all about the financials. Let me turn the presentation to President Chee for the business update.

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

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Thank you, Sharon. Okay. So some highlights for our second quarter this year. And then, first of all, we were pleased to have won Best CSR Award from Global Views Monthly for that 4 years in a row now. And also, we were just recently granted Best Success Service in Taiwan in the telecom category by Commercial Times. This is 9 years in a row and the only one that has been awarded this prize.

And then we have launched 5G service. And then as people know, all 3 -- big 3 have launched the service in early July. And our -- we also have launched our remote, or we call it telemedicine, remote diagnosis in Taitung areas. And then, this is really exciting, and then this is really rewarding for us, because we look at this not just from the pure business or profitability perspective. But this is really -- we look at it as our best opportunity to return to the society. So we are able to provide folks in the far-flung -- hard-to-reach areas for them -- for the kind of medical care that they need through our 5G technology and with associated medical devices. The results have been impressive. And then so we are in progress to expand to more areas in Taiwan. And we also have to get some funding in this area.

Okay. And then in terms of Smart Factory, we have we have picked up from our alliance with Microsoft and also Delta Technology. And we are going to build the first -- Taiwan's first 5G Smart Factory, okay? And then we also announced our 5G services and pricing plans on July 3.

And we show the picture of the event that day. It was quite an event. It was very interesting, fun-filled. And then also, we have announced our detailed pricing plan, which is kind of some aligned with the other 2. But then I think we had -- we do have a little bit better offer or at least more from the consumer's perspective. So very soon after that, our price was being followed by our peers.

Okay. And in terms of the new 5G services that we have offered, that includes the VR and through our friDay video, friDay video department that we have expanded and added another app for the friDay VR. And then for the existing friDay video application, we have introduced a Multi-view feature. And then we have also introduced content for that matter. And then the folks that have signed up for this service can already view it. Some of them are for free for their -- just to -- for them to get a feel for it.

And then we have High Sound Quality Music. And we also have 4K Video content. And then even though there were only a few, 3 to be exact, handsets that were available in the month -- early in the month, but then, some of them, if not, all of them are -- you actually could see the 4K video resolution on the phone with the 5G connectivity. And then we are going to introduce Cloud Gaming in fourth quarter. Okay. And then also, we are about to launch our VR Family Theater feature. But then that's coming soon.

To recap what we have done in the 5G area, as folks know, that we have got 80 megahertz. And then we also got the best location that we wanted for this 3.5G spectrum. And then because we used some -- the venture that is offering the 4G, 5G Dynamic Spectrum Sharing, and we believe we'll be able to optimize our network performance and then really look at 4G and 5G together as a ubiquitous network and to provide that end-to-end experience for our users. So this is not the user from 4G to 5G. This is really users to have experience from 4G to 5G plus 4G. Okay. And we describe it as a 2-layer cake. Okay. And then, of course, there's icing on the cake. That's all these extra or additional 5G services that we provided.

And then for the coverage, for the network coverage, we are building, as we speak, and then we are looking at -- the first priority are on the 6 metropolitan areas. And of course, like in order to support the telemedicine initiative inside home. So even though that county isn't as much populated as the northern area, but we still have our presence of the 5G stations for that matter to support this telemedicine.

And then we will reach more than 50%. It's actually 55% nationwide, the population coverage. And then for Taipei City and by the end of the year, it will be 80% population covered. Then in the new Taipei City area, it will be about 78%. So -- but then if you take the average for the whole nation, that's about 55% by the end of the year. And that will be looking at about up to 4,000 stations that we will be deploying. And right now, we are about half of it. That's where we are. And then like I said, since early May, we started deploying that we have been on schedule and at the same pace throughout the few months, and this will continue until the end of the year.

Okay. And also we -- I touched on the pricing. I believe our pricing is very rational. And we also really look at it from the consumers' perspective. So that's why when we offered TWD 999 and TWD 1,199 in the cake there, it's not unlimited data plan for 5G. And then when the -- and then instead, it's a 60G per month or 100G per month. Once it's used up and then the users will fall back to the 4G plan, which is already unlimited, and then we will still guarantee there like average up to 50 megahertz, megabits per second kind of speed, to give them a very good 4G speed.

Okay. And then for those 5G trial subscription. So we actually, for this month, since we launched on the 3rd, what we see on a daily basis has been very impressive, very encouraging, and we like what we see. And I think we -- it's even better than we expected. So almost 80% of those have signed up for the 5G plans are our renewal customers. So that's the existing customers' upgrade. And then also, 99% of those that signed up for 5G, they signed up for the plan that is at least TWD 999 in then above. Okay? And then so just for this month, we already see the average monthly bill on the same customer base. We already see the uplift by 12%. So we are encouraged by what we see. And even though this is a slow month, so if you look at the total sales-wise, it's about flat from June. And then so we are hoping, as we are getting more devices available in August, and this should improve. And then when the iPhone becomes available in late September or early October-ish, and then that is when we should see the peak.

Okay. And then in terms of our 2020 second half priority, we will continue and accelerate our 5G RAN rollout. And then on the -- for our consumer business, as I mentioned earlier, we are going to launch the Cloud Gaming services. So that is something we are working on. And then of course, we will work really hard to convert more on existing subscribers to 5G plans. And if we will get some new ones from our peers, we'll be happy to take them, too.

And then on the enterprise side, we will create and deliver private network solutions for -- from the previous POCs. We have quite a few engagements and then quite a few leads in our pipeline. We just need to close the deal. And then we would like to, of course, increase our market share and presence in Smart City, Smart Manufacturing and the Smart Telemedicine, which we see a lot of growth opportunities or growth potential.

Okay. With that, I think that concluded our presentation for you, and we will welcome questions.

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Questions and Answers

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Operator [1]

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Yes. Thank you, President Chee.

(Operator Instructions) 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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Congratulations on taking the CFO role. I really had just had 1 question, and it's on the second half. As it relates to the guidance. So I think in the first half, correct me if I'm wrong, but your equipment sales were probably were lower than you expected because of COVID.

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

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Correct.

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

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It does have to pick up -- yes. So that should pick up in the second half. I mean, you're slightly ahead on profit. But presumably, the marketing expense is going to accelerate as well. So is that the main change you expect in the second half? Is that the main sort of cost driver? Are there other levers there?

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

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Okay. So first of all, yes, you're right. Our merchandise sales was impacted by COVID-19, and we do expect some rebound. Now would we totally recover what we have not gained in the first half? I think that will be a question. And we believe it will rebound. But if it's -- if it's 100% recovery, I wouldn't think so. But then on the other hand, in terms of the OpEx reduction that we have seen in the first half, and you're right, there is some of that is the variable cost associated with the sales and all that. So they were reduced when the sales was lower. And then as we expect more sales and more merchandise and subsidies, so that will go up.

But then overall, we have done cost control more than just the variable cost. So in our facility, our utility, across the board. So we will still continue to do that. So the cost control is still high on our priorities. I don't know if I answer your question, but if not, let me know.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [6]

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Okay. Helpful. If I could just follow-up on the 5G cost side. So it looks from the way you discuss the tariffs that the high levels of data usage in Taiwan are going to continue. You've got very large capacity 5G plans, unlimited on 4G. So do you expect the costs related to the operating costs to continue to increase? Is that going to be a drag on your profitability as you're supporting much higher levels of data usage than operators in other markets?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [7]

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If your target -- well, so first of all, even without 5G, right, our network -- work on network is never stopped. So there is definitely a shift kind of effect, right? So we are shifting some of our investment and our related costs from 4G to 5G. And this is kind of a technology evolution, right? And then so associated operating costs, there will be some shifting as well. And also, as this is an NSA architecture. So when we build or we deploy these 5G stations, in many cases, they are deployed at the same stations and locations on top of what we already have there. So these are not like something we start from scratch. So that itself, there's already a synergy, by reducing what we already have deployed previously. And in some cases, like we have -- in some stations where we tied some of the 3G equipment and there's also that synergy. We can just reuse those space, and then in terms of the utility, consumption and all that.

So -- but then since this is a new technology we are deploying, so yes, there will be more expense incurred. That is just natural. But then, that's also something we have taken into account in our forecast.

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Operator [8]

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And next, we'll have Billy Lee of Crédit Suisse.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [9]

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I've got 2 questions. The first question is on 5G subscriber. I see on the slide at the end, you talk about there is an encouraging trend of existing customer upgrade to 5G plans. That's very encouraging. Can you talk about like the number of 5G trial subscribers that you have for that trial right now? Or I just want to know, what's the recurring number of the 5G subscribers. That's the first question. And the second question is, what's your target number of 5G trial subscribers by the end of the year and by 2021? Those are my 2 questions.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [10]

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Okay. All right. We knew this would come up. And we also know my team who had an IR call yesterday, didn't give them that number. But at least I'll give you some clue. So for the first month, or it's not really a full month, from the third, right? From the third day when we launched the service, we are seeing a few tens of thousands of subscribers already in this month so far. So it's like 28 days or so? Yes. And then we were expecting or we were hoping that first year -- that this was before pandemic, of course. So our regional forecast was to -- and our goal was to convert 20% of our 4G subscribers to 5G plans. But then if I just take a sample for what I see in the past month, out of the total renews and GAs that we get, it's about 20% that we actually got them to sign up for 5G. So just so for small sample like that, this is what I was hoping, and this was even before the pandemic.

But then, I think the big question is, really as we all are not able to predict what the situation will be, would it get worse? Would it get better global-wise? And then Taiwan cannot be isolated from the rest of the world. So when -- if the whole consumer market is going to be impacted, that will be something really beyond what we can predict. But if this is under normal time, and then this first month, while we didn't have many, and we only have 3 handset devices, very limited supply, and then I'm seeing 20% of a conversion, even though the sales is relatively smaller or lower than our good month. But then if this can serve as a reference, I think we are seeing 20%. The question is how long this will last and then how the total overall consumer market will be. I hope I answered your question a little bit better.

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Billy Lee, Crédit Suisse AG, Research Division - Equity Research Analyst [11]

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Yes, very helpful. But I just want to clarify for 20% so far up to this point at the month today, did you -- what 20% means? Like, can you clarify a little bit? Or is it 20% of the total...

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [12]

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Like, I'm looking at my daily sales, right, the daily transactions. That includes the new apps and then that includes the renew. So if I look at just the daily transactions, I'm looking at about 20% of them will sign up for 5G. That's the 20% I'm looking at. So it's a small sample. And then statistically, it may not be all 100% correlated with the eventual number we are looking at. Also, another point of clarification. When we talk about 20% of our subscribers, and then we are really talking about postpaid, because those are involved with contract. They come to the stores for renewal or whatever. This is different than prepaid, and which, the service we offer right now are to postpaid first, anyway. So I think there is a confusion at some point, because our overall number is like a 7 million, but then our postpaid is about 537 -- 5.37 million, right? So there is a difference in the denominator or in the base that you would use. But then we were talking about postpaid.

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

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I see, I see. That's very clear. Can I just ask 1 more question? On the coverage, the base station coverage that you talked about, 4,000 is the target by the end of the year. And do you have the figure for next year? Because Chunghwa obviously has a target. And I just want -- other one detail. I'm also interested to know about the CapEx trend in next year and beyond, if possible.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [14]

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Okay. Yes. So for this year, we are talking about 4,000 or up to 4,000. Those are the ones that we will deploy at a 3.5 spectrum. Actually, there will be at least a few hundred more that we will deploy at the lower band as well. So if you look at the total number of stations that we will deploy for 5G and not restricted to just 3.5G, we'll be more than 4,000, right, for this year. And then, because that's our optimized spectrum planning here.

And then for 2021, I think it would only make sense -- well, first of all, there are a couple of factors I always say that will affect how much we would want to invest. First, that is how the market -- how the consumers react to what we offer. Right? So for the next few months, I think as we already planned to deploy 2,000 more, at least. So as we are deploying, we will see how the market responds. And then we can decide in 2021 how many more we would like to deploy and also where. Because we continue to do the big data analytics and to see where the demand is and where we need to put more resources. So it will not just by a numbers game, but it really needs to do some thorough analysis to decide how many we need and where.

So I wouldn't give a number. But then if the market responds really well, it wouldn't make sense, I don't respond or I don't react to it and then wait a couple of years later. So if the market responds well, I think we will just continue the same kind of pace.

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Operator [15]

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(Operator Instructions) The next question is coming from Sara Wang of Morgan Stanley.

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Sara Wang, Morgan Stanley, Research Division - Research Associate [16]

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I have 3 questions. First one is that congratulations again on the 5G adoption. The initial ARPU rates toward the high end, especially compared with peers over the -- for example, in Asia. So may I ask what's the key pattern or what's the reason we are seeing that customers are upgrading to 5G? So for example, in other markets, some country offers higher data allowance in 5G. Or some countries have many new 5G handset models. So what do we see in Taiwan market to incentivize people upgrading to 5G?

And then second question is the new economy business. May I ask how much percentage of total revenue is it for now? And then going to second half, are we seeing a decline or a delay of -- especially like enterprise ICT projects. Any COVID-19 or macro uncertainties?

And the third question was just on dividends. So it seems like based on our right guidance, if you want to keep flat dividend, the payout ratio as a percentage net profit will be really high. So at this point of time, do we have any comments on the outlook?

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

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Okay. I'll answer your question in a reverse order. So first on the dividend. I think it's really too early, and then we are not at liberty to comment on that.

And then your second question, regarding the new economy. For the second half, we -- for the first half, what we are looking at it's already 15.3% of our total revenue. And I think it exceeds our target. Our target was like 14%. So it is 15.3%. Okay?

And your first question about why I think our consumers are converting. I have to say because I think Taiwan is the second cheapest 4G rate plans worldwide, right? And then I believe our consumers do know that. They do know that they got really, really good deals, right, on 4G. And even with our 5G plan, when they compare, okay, TWD 499 versus TWD 1,399. My answer was always you are comparing oranges and apples, right? So TWD 499 is like a SIM alone. And TWD 1,399, you get the new phone and then with a good size of subsidy and you get a much better phone and you get to get on 5G when the 5G is available. So you get better service and on top of it, that's the icing on the cake, you also get the new services, right, and you get a new features that are associated with 5G.

And I also like to use analogy. People are saying TWD 1,399 is too expensive. I ask them. You have a cup of coffee from one of the convenience stores for TWD 45 a day. If I ask you, I give you TWD 45 a day, do you want coffee or you want the -- whole day unlimited data and voice and then you're able to make calls, do things with your phone? What would you choose? Or if I pay you TWD 45 for your whole day unlimited data access and whatever you can do with your phone, would you sell it to me? And I don't think anyone would do that, right? So TWD 45 a day is certainly a very, very good deal. And then nobody can deny that. And I do believe Taiwan's consumers are really smart, and they know they are getting a pretty good deal with 4G. And then our 5G offering, given the cost that the telcos have put down, it is more than reasonable. And then I think they see that, and more of them will see that. I'm confident in that. Okay? I hope that answered your question.

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Sara Wang, Morgan Stanley, Research Division - Research Associate [18]

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Yes, just maybe a quick follow-up on for example, the 5G plans. Definitely, customers will have a much better experience, for example, from the TWD 1,399 services. But in terms of margin of cost, it seems 5G will involve more for example, operating costs, especially sales, marketing or handset subsidy. So what's our strategy on, for example, sales and marketing budgets going forward for 5G? Are we looking for something like 5G stand-alone, for example, for a single customer, that EBITDA margin should remain flat versus our current level? Or how do we look at the, for example, incremental 5G subscribers EBITDA margin?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [19]

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Okay, so -- well, first of all, we are -- well, the resources are always limited. And then 5G is definitely our priority. So in terms of how we would allocate our money for the subsidy or whatever, marketing, acquisition cost or funding that we have for 4G versus 5G, and I think the choice will be clear. So again, it is like a reallocation instead of like on top of what we have used to offer for 4G, and we add more for 5G. So the net-net should be about the same and maybe just a tidbit more, but then it wouldn't be a lot more. And then because there is a reshuffling of the funding that we do for marketing or for the subsidy.

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Operator [20]

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(Operator Instructions) Next to ask questions are from Danny Chu, Bank of America.

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Wai Kit Chu, BofA Merrill Lynch, Research Division - Director [21]

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I just have 2 questions relate to the new services that you just launched. First question is on the 5G telehealth service that start from launch. May I ask what is the business model? Like, I mean, how do you charge the customer? Is it on a so-called per clinic visit or how the service is being charged? That's the first question.

Second question is also about the cooperation with the Delta Electronics on the 5G Smart Factory. We just collect like an upfront payment from Delta Electronics? Or we -- similar to normal monthly subscription model, we are getting a monthly subscription fee from Delta Electronics? Or it is just entirely based on the volume of data usage?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [22]

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Okay, I'll answer your first question on telemedicine. So this is -- we will have 2 parts, right? So one is installation, the setup of the network. So there is that solutioning aspect of it. And then also, for the -- then, there will be the ongoing subscription, the usage, right? And then -- so there will be a recurring monthly fee kind of arrangement. And then this will be charged to, in this case, like we were working with the city, right? And then -- or the county. And then, there is also some funding that comes from the health and the welfare department.

So this first project that we did with Taitung, it's kind of like it's a pioneer. And then so while we are doing this, and I know our government is welcoming this kind of -- they think this is very creative because in the past, people think, okay, if there is not enough medical resources for those far and away kind of areas, then you just build hospitals. But the problem is there is no doctors that will go to those areas. So you get empty hospitals with all the hardware, but no software, no experts, right? And then so this using the telemedicine, we are using the network, our network to replace the actual role so that the people otherwise will need to travel. Either it's the patient or the doctors. So they look at this model as very effective. And then so we have got a lot of interest and encouragement from the government to do more.

And then so exact business model, I can't say I already have a charging, a bill set up for this. But then at the beginning, there is a project funding that is funded by the government. So as for the ongoing, once there's going to be a per hospital, because there will be a public hospital, there will be a private hospital, that should be a different kind of model. But then at the beginning, all these that we have done, they all got some kind of government funding as well. So that definitely helped, okay?

And then for the second one, the MOU we have signed with Delta and Microsoft is really an indication that we are solutioning together, because this is combining the communication technology that we are good at, right, we are best at, plus the IT, the information technology. That includes the infra, that includes the applications, and then that includes the cloud layer. And then so this is where Microsoft and Far EasTone, we both have an important role to play. And then of course, on top of it, it is the operations technology. That's where Delta comes with, right? So this is a total solution that we are integrating it together. And then the idea is once we have this set up, similar or maybe smaller scale of solution or similar solution can be repeated or replicated for other verticals or companies that -- where they need factories.

So the total solution, if we now -- so it's not how much I charge Delta or Delta charge me. In this, we are partners, building the solution together that can be replicated for different verticals, factories. And then that are interested in becoming a smart factory, especially a lot of our Taiwanese investors or corporations, they have now come back to Taiwan. So they are looking for a piece of land, and they are looking for places to build their factories. And we think this is the best time, when they start from scratch, they put this mobility into their consideration at the beginning, from the getgo. And then they can already become a smart factory kind of setup, and that will provide them with the kind of flexibility and intelligence that they will need in order to get their business the kind of flexibility and agility they would need. Right?

So -- and then, so we, with Delta and Microsoft, are building that solution together. If there is another company from another vertical that is interested in this solution, then of course, there is -- depends on the cost of how we -- each piece that we come up with. And there will be some of that as onetime cost for the setup. Then, there may be some hardware involved like some of this equipment like an AGV, because -- and this will be used -- will be Delta, some AGV products, things like that. So it all varies. But then yes, because there is a connectivity involved, so there will be recurring fees that will be -- that is a communication layer that we will be collecting.

So it will be a mix. It's a hybrid model. And then we don't -- we actually don't have that set up yet as we are just building this first one. But then going forward, then your question, it will be more clear to us. But at this point, we didn't start with, okay, let's look at how we're going to share the profits and all that. We are looking at how we build this solution together. But then your question can be answered later once we get this deployed. And then we should be thinking about that.

But I think it's important to know that our involvement is more than just a communication layer or just collecting the monthly. There is also managed service that we can provide, to run the network for them. And then also, thirdly, when I was talking about the IT layer, that would include the IoT, the applications and then the dashboard, the data analytics. And that's where Far EasTone would have a role to play, and that's where we would have added value. And therefore, our margin will have some in that layer as well. It's more than just the communication technology based on the usage.

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Operator [23]

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Thank you, President Chee. And the next question is coming from James Wang, UBS.

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James Wang, UBS Investment Bank, Research Division - Research Analyst [24]

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I've got just 2 questions. The first one is on the 5G subs where you've seen a 12% uplift in ARPU. So can I just check what the handset subsidy level is for these customers compared for 5G packages compared to where they were before? So in other words, net of handset subsidies, is the ARPU still up or is it flat or maybe the increase is higher than the 12% that you've indicated?

And then next question is on the new economy growth of 26% this first half. Can I just understand how much of it is driven by COVID? You talked about some hospital projects funded by the government. Going forward, I assume the situation eases, would the growth rate come off for the new economy business?

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

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Okay, so you have 2 questions. The first one is about the uplift, right? So you are asking before and after, let me see. Let's get to you the details or we can provide that to you -- maybe we can provide to you later. I think -- well, first of all, I need to clarify. When we were talking about the 12%, we were looking at that same customer base. So in other words, for this past 28 days, those that came to renew. And then, before they renewed, they have a price they paid for, right? And after they renewed, they -- maybe they still renew as 4G customers or 4G rate plan, and they may even go down or go up, or they may sign up for a 5G plan. So that's how we compare the before and after the average. And that's where we see the 12% increase. So are we on the same page there?

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James Wang, UBS Investment Bank, Research Division - Research Analyst [26]

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Yes, sure.

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

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Okay. All right. And then you were asking exactly how much that is? Is that...

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James Wang, UBS Investment Bank, Research Division - Research Analyst [28]

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So what I'm asking is for these -- whether these customers had a lower handset subsidy before and now they've got a high handset subsidy, and therefore, whether the net ARPU to you guys or the net [instrument] is better? Or is it worse or is it better compared to the 12% we've seen?

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

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Oh, I see. I see. Oh, okay. I see, I see. So -- well, first of all, the different tiers of pricing, the subsidy will be different. But then that is also what we did with 4G. So if you compare the subsidy I would have paid for if user is on a 4G plan versus 5G, that's about flat. Tier by tier.

And then also, the 4G subsidy, at the same time, like I was saying, we were shifting our dollars, right, our funding. So what we would have paid for the 4G customers. So this is also part of the reason why we said more people will convert, because if I were the customer, I will need to renew. If I renew for 4G and then maybe I get a phone. But then the phone, I will get the subsidy versus what I would get if I just go straight to a 5G, I will of course offer better for 5G and then offer less for 4G. So you think 5G is better than 4G and not because I still keep 4G at the same level. And then -- but then it's like I take some of that to help with the 5G. So I can differentiate the 2 more. And then that will entice the users more, the subscribers. Did that explain?

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James Wang, UBS Investment Bank, Research Division - Research Analyst [30]

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Okay. Sorry, can I just -- so you're saying there will be more handset subsidy for the 5G packages compared to 4G, is that right?

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [31]

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Yes, I think you can say that. And then that is because we adjusted down. So it's not like at the same 4G level like before we have 5G services.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [32]

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The other opportunity for 5G is actually, we will increase the sampling rate. I mean, sampling rate, trend rate, internally, when our customers sign up. So we have a lot of people. It's only sign up for SIM-only rate plan in 4G. So right now, after they decide to upgrade to 5G, they have a handset demand. So they will sign up a higher rate for -- company rate plan. Higher plan, actually.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [33]

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It's because well, 5G is a new technology. You need a new phone for you to be able to use 5G. So that certainly triggers the need and more demand for 5G. Unlike 4G has been around for many years, right? So quite a few consumers. They -- when they do the renew, they don't necessarily buy a new phone. So we see more SIM-alone cases in the last year or 2. But then with 5G, that's different. It's a new chapter now. So we do see more device demand, and that helps, too.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [34]

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And then EBITDA for 5G rate plan is certainly higher than SIM-only rate plan, and the EBITDA contribution, okay?

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Operator [35]

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(Operator Instructions) There are currently no questions.

Then I'll pass the call back to Mr. Gary Lai. Gary, please proceed.

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Gary Lai, Far EasTone Telecommunications Co., Ltd. - Senior Director of Strategy & Finance [36]

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Thank you, everyone, for your attendance, and see you next quarter. Thank you very much. Bye-bye.

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Chee Ching, Far EasTone Telecommunications Co., Ltd. - President [37]

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Yes. Have a nice weekend, everyone. Thank you.

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Operator [38]

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Thank you. And ladies and gentlemen, 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. Goodbye.