Far EasTone Telecommunications Co., Ltd. (4904) Earnings Call Transcript & Summary

Welcome, everyone, to Far EasTone's Investors conference call. [Operator Instructions] And for your information, a webcast replay will be available within an hour after this conference ends. Please visit www.fareastone.com.tw under the Investor Relations section. Now I'm going to turn the call over to Mr. Gary Lai, the IR Officer. Gary, please begin.

I welcome everyone to participate today's conference call to share FET's strategic partnership with Asia Pacific Telecom. Today, our President Chee and CFO Sharon both join the call with us. Before the call starts, please kindly pay attention to our first page, safe harbor statement. Let me pass the mic to Chee, please.

Okay. Thank you, Gary. Good afternoon, everyone. Thank you for joining us. Yes. So you -- by now you have heard or you have seen some news about our cooperation deal with APT, Asia Pacific Telecom. So I want to take some time today just to explain to our investors on what this deal is about, if you haven't really read it or is there still some question or some confusion that you may have found in the news report. And then, of course, there are always some news there that are not all consistent, so maybe there's some confusion you have. So we will be more than happy to entertain your questions later. Okay. So to sum it up, so this cooperation is based on the 3.5G spectrum sharing because, as you may recall, APT walked away from the auction empty-handed. They didn't get any spectrum bands. So in this case, they are looking for a partner. And I have always told the media when I was asked, like, what is our policy, what is our view on the spectrum sharing? And ever since the NTC already passed the regulation that this sharing is allowed and then they would like to advocate for it, and we are always open to this. And -- but then I also have stated that it priority is first to deploy our 5G service. So after we launched the service, and that's when I kind of pay attention to this area, and so this may have come as a surprise to the market or to some of our industry, and this is -- has been consistent with my view on how we and when we will handle this kind of opportunity. So -- and then as we were ready and then we are -- we have been open to the sharing. And then as you may have seen some analysis or as an analyst yourself, you must already have done some analysis for us as well. So #1 benefit for this is really the cost savings, right? We did pay good dollars for this 3.5G spectrum. So having to share it with APT, and then with a fair cost-sharing ratio, I think this is really mutually benefits -- mutual benefits to both of the companies. And then also the cost sharing is not only the spectrum license fee, which is about TWD 42 billion that we be paid -- or more than TWD 42 billion we paid for. And then also, the 5G network we have deployed so far, the CapEx and then also going forward. And then, plus, once the sharing starts, then the associated OpEx going forward. So it is pretty comprehensive. And then if you look at from the cost savings perspective, it is long term. It is going to be just ongoing. And then of course, the first part of the lump sum payout on the spectrum fee -- spectrum license part, that is a big lump sum and certainly would help us with our cash flow. And then -- so we have done some analysis there as well. So that's how this should be looked at. So the very first phase is to share the spectrum. And then -- and of course, we're sharing the use of spectrum. And then there is also the sharing of the cost. And then we do this -- and I should say, for Far EasTone, I can -- I could tell you, so for whatever we do, the deal or the cooperation or whatever you call it, it has to be based on mutual trust. We need to be able to trust a partner, right? And then also, this is for both like a mutual benefit. It has to be fair to both parties. And then we also look at the synergy, when it can be a win-win. So then most importantly, everything we do will abide by the law, by the regulation and by the rules that we are given by the government, right? So that -- those are the 4 basic principles that we all have to follow. And I think it's the -- yes, I think APT also shared the same view, and that's we will be -- that's how we could have achieved this just in a matter of 2 weeks or so, right, to get this done between us. And then another part is, after the sharing is approved, then we will proceed to the next phase. But then, of course, if you try to be in the shoes of APT, right, they are not going to pull out cash to any company that will just let them here and get all this money. They also wanted some assurance on their side. This is a true partner they can work with. So having asked the partner to invest in their company which could definitely use some more capital as well or the cash as well. So that's why we agreed to invest TWD 5 billion, right, to have our 11.58% of APT's stock, right? And then -- and this is the part there -- I mean this is an unfulfilled part of their private placement that they have some issues last year. So this is just to complete that for them. And then so that is part of the first phase kind of arrangement. And then once that is all done, and then, of course, approved, and then we would proceed to the next phase. And that is when we will actually issue about 2.45% of our Far EasTone new shares to exchange for Hon Hai or Foxconn's portion of their APT holding, right? And then so the end game is Hon Hai or Foxconn and Far EasTone will each hold 23.8% of APT shares. This is to show that we are equally committed, right, to this -- to APT and then being a long-term strategy partner, okay? And so that is kind of like the itself. And I have another slide that will talk about the structure in a little bit more detail. But then if you look at synergies, because I got asked during the press conference, people ask about the group synergy between FET, my parent company, Far EasTone Group and also Foxconn, right? And then these are both big groups. And then we have -- we certainly see the potential synergies. But I also have told the reporters, even without the deal that we have with APT, just that fact that Foxconn has been investing in the Wibox, right, for the network. And then we are -- so we are also open to try the different standards, some network products. So that itself, we can certainly see the synergy to work. So then with or without the deal with APT. But then with that, having this cooperation relationship, and then also APT will be sharing our network. Then of course, that is more -- it is assuming, right, Foxconn makes good products. And then of course, we would love to try it out. So that just goes without saying. And then so the potential beyond that are there's more synergies. I think there may be. But then to be very honest, that wasn't part of the scope that we concentrate on. As you know, 2 weeks wasn't a lot of time for 2 companies to strike the deal. So there's a lot to be really well thought out. And then just based on what you already learned about the scope, that's already a lot for us to -- for my team and their team to go through to work through. So in terms of the future synergies between the groups, that wasn't really part of the scope of our discussion or concern. But then I would say, definitely, there will be synergies. Okay. And then again, all transactions we talked about here related to this cooperation, they are subject to approval of the government and an agency. There is pre-trade committee as well. So until those all pass, right, none of this will start or will proceed. Yes. So this is just to remind everybody, okay? All right. The next slide, the proposed deal structure. Hopefully, this will complete you more. So at the beginning, GT is APT. Why do they call it GT, by the way, GT? It's a brand? Okay, that's their brand. So -- but then that's APT's logo. All right. So they will pay us to use the spectrum. So 2/9 of the cost, they are entitled to 2/9 of the capacity. If they are -- they pay over it. And then similarly, if we use more than -- if the total capacity used is more than 9 -- by FET is more than 7/9, and then we will pay them. So that -- but then that is when the 5G network is really, really full. That will be several years from now. But at the beginning, the ratio of the splitting is 2/9, and then there's this is 7/9. That's how we share the cost, okay? And then in return, so they pay this cost, and then in return, and then they get to share the spectrum with us, okay, for the 5G network. And then in terms of the private placement part, right? So they will issue 500 million new shares of their stock that they didn't really finish the business last year. And then we will pay up to TWD 5 billion to acquire this 11.58% of the APT stock in total. Okay. And then we expect -- we have a target date for the completion, that is May 31, 2021, that's next year, May 31 next year, because anticipating the time it takes to go through the government agency, and we also need to resubmit our business plan and all that, which we spend months just to get a 5G license, right? So now with this spectrum sharing thing, so we need to revise some parts of it. So we just have to follow the due process and all that. So we expect several months that, that is probably the minimum. But then we set a target day for May, okay? All right. And then after that is done, the next phase is the share swap. That is when we will increase our shares holding to 23.8% by we -- Foxconn or Hon Hai, they were release 12.22% out of their 40-some-percent holdings. And then to reduce their holdings to the same percentage like we will have, which is 23.8%. And then this is by us, FET, we will issue 81.8 million new shares. That is about 2.5% in the total new release, that it's about 2.45% of our total FET stake. So if anybody is thinking about the dilution, that is still not significant. It's pretty limited. Okay? All right. Next slide. Okay. So why are we doing this, right? So as I kind of started off my talk, it is really, number one, cost savings, right? And then it will definitely help us improve our financials in many ways, right? And then this will give us some relief. And then also, we will be able to increase our investment for new services, because deployment network is really only the first step, although it is very important. It is very critical to have a network. Then you can actually support those new services on top of it. But then we should also increase in our investment for these new services, whether it is we acquiring new services or we do our R&D internally or a combination, but then you need money for it. So now this way, we can actually allocate more money for developing new services. Okay. And then we have -- even with that, right, if you look at the spectrum per subscriber, the premium spectrum size, bandwidth per subscriber, we -- compare with the top 3, we are still the #1. So our consumers wouldn't be impacted in terms of how much they can use and all that by any means. Okay. And then, of course, this is also beneficial to the environment. Just like the one government official was saying, we don't need 5 highways. But then you certainly -- one is not enough, right? But then in this case, APT is like, they don't build their own 5G network, but then they share with us. So in a way, we are helping the environment as well, okay? And then, of course, this way, we will be able to explore more synergy, as I mentioned earlier, between the 2 groups, our parent company. And then I will be lying if I told you this is strictly cost saving. Of course, I think about our competitive advantage. So this move is also important for me to assure or reassure our competitive edge in 5G. But we did spend a lot of money to get us good premium spectrum and then with a good location, right? And then so we want to maintain that. And then if I don't do this, somebody else would, and then that may change the situation. So by doing this, I feel pretty good that I will be able to maintain our competitive edge to 5G as well. Okay. In terms of the potential financial impacts for FET, significant cost savings and then improved financials. If you look at our EPS for 2020 is still neutral. But then starting in 2021, we will see EBITDA and EPS accretive from 2021 onwards. And also, this will have positive cash flow. And then it will be -- it's positive cash flow projected for the next 5 years. If we go further, it is still positive as well. We just use 5 years. Then also, it is going to give us a more efficient balance sheet with lower debt ratio. And then I think that helps as well. And then in the case where FET is approved to swap shares with Hon Hai by issuing 81.8 million new shares, and then as I've mentioned just now, the share dilution is very limited. If anybody is concerned about it, I wouldn't. Okay? Right. Okay. So now that is all I have kind of put together quickly for your reference. And then now we can open for questions.

[Operator Instructions] The first to ask question is Peter Milliken, Deutsche Bank.

And congratulations on getting a deal done and helping move the Taiwan market forward. I can understand the reasons why you did it in terms of sharing the cost base and perhaps helping you to have unit cost terms over Taiwan Mobile and Chunghwa. But it doesn't seem to be very good deal for APT because things like they get the same cost per bit that you're getting even though they're the subscale player. Is that a correct analysis?

Sorry. Excuse me, sir. Your voice is kind of in and out. So it's not clear to me what you just said it because your voice is in and out. Of course, your answers didn't help me either. But if you would just repeat your question, and then maybe louder, I can hear you more clearly.

Okay. Let me just try and moving the phone slightly. Hopefully, this is better. What I was saying is the unit cost are better if you're sharing, so I can understand why you would do it. But then the unit cost would seem to be the same for APT as it is for you. So APT being the subscale player seems to be getting a very good deal. Is that fair to think that way? Or was there some cost synergies that I'm not quite understanding?

Well, I think when it comes to partnership and then -- or a deal, right, negotiation is not always that straightforward. There are many different factors. But then if this is just a onetime deal, or I pay you something, you give me something, and then we try to get the best deal out of each other. That's one thing. But then this is why the strategic partnership comes to play. If you look at the ratio, some would say, well, if you don't offer -- so maybe APT should pay more because, otherwise, they didn't have anything, right? Because they didn't pay any else the auction price. But then the -- you can also look at the other way. Like I said, at the beginning, right, the network is not full. They're far from full. We are just starting, right? We are just starting to fill the network. We still have a long way to go before the network gets full. But then right away, they already are paying 2/9 of the cost before. And then their current customer base should probably take even longer for them to adopt or convert to 5G, but then they are willing to pay upfront already 2/9. So this is a give and take. And then based on the more longer-term strategy, I try to be in their shoes as well, right? So if they can really maintain a good business, that they -- it really wouldn't do me good either once we cooperate. So I think this is acceptable. And then I guess my -- they have other deals they will consider. If you ask me, maybe another company would say, well, they would be able to get a much better deal, but then they didn't, right? So I think you can always say this could go either way, but then you really cannot predict what the outcome would be. But I'm fine with what we have. I think it's fair enough.

Yes. I can understand it. So a very good defensive move against the other peers at least. And maybe one follow-on question from that. If the 23% stake is good, would a 50% or 100% stake has been better? Or would that just lead to problems having to consolidate APT's losses?

Well, actually, so this is like -- there is always risk, right, involved, right? And then it is a fact, right now, APT is not in good shape because they have been in deficit, right? So now although we think after they start using our network, at least for the 5G part, one of -- I believe one of their major weakness in their overall -- as a brand is they really didn't have a very good quality network. And that could be due to many reasons, right? But then once they start using our 5G network, and then part of that will be our 4G as well, so that improves their network position, which is critical to telecom services. So their position should improve. And then the fact that with same market tells us the story, right? So I think a lot of people think the same. So I believe or I hope, and I have reasonable confidence to believe, once they partner with us, they should be in a better position and their profit situation would improve. But then there's always risk, right? So for me, this is not like I -- we are talking about that I want to acquire APT. No. That is not an M&A kind of thing. This is just a strategic partnership. So I think -- and then this is over why I actually wanted to have equal share their parent company. That means we have equal interest and commitment to make this company better, but they're not more or not less, right? So I don't know if 50% will be better. All the future risk is I think 23% is what I'm most comfortable with.

Yes. Okay. I can understand that. And just one very last question. If APT is using less than 2/9 of your capacity, do they still need to pay 2/9 of the cost?

That's correct. Yes. So that's why it's like fixed. That's why it's really not bad.

Next one to ask question, Danny Chu from Bank of America.

Just 2 quick questions. First, actually, it's a follow-up on some of the points that you just mentioned. I understand the latest strategic partnership will benefit Far EasTone. But in terms of the competitive landscape, should we expect the intensity of the competition on 5G will increase because of the latest partnership with APT? Or you expect the competition within the 5G business will probably reduce? That's my first question. Second question is, going back to the -- some of the 5G CapEx will be done by APT, I recall that we have a CapEx budget guidance of TWD 10 billion this year. So will half of that also be done by APT because of the latest partnership? Because the slide, the APT only mentioned about the guidance for the EPS won't change for 2020. So I'm just wondering whether the CapEx guidance will be changed this year.

Okay. So first of all, it won't change it, okay? It won't change it. And then in terms of our investment plan for this year, it also stays the same. As I said, we are -- we have been very aggressive in deploying our network so -- even before the partnership. And then so with the partnership, we really don't see the demand will necessarily change that much that we have to do differently. And actually, we are maxing out the capacity to deploy because we need different E&C and all that. So we already kind of maxed out from our planning perspective, how many stations we'll be able to deploy. So we're already at the max. So we won't change that. And that stays the same. And the reason why we say 2020 stays neutral, only because we are not anticipating the completion of this deal, the approval. So this won't really take effect until next year. That's why from this year's perspective, the EPS, our expectation is in terms of this deal's impact, that is 0, that is neutral. Did that answer your question?

Yes.

Okay. And then if I didn't make it clear when I talked about cost savings, so like this year, even though the -- we may not start sharing until next year, but then this year, I already deployed some thousands of stations. All that network capital, that's considered part of my 5G network. So APT will pay for the 2/9 of it as well. So that's not -- that part is already starting. It's not excluded. And then -- but then its OpEx, like starting next year, when they start using our service, our network, and then the OpEx going forward, that will be split at that ratio as well. But in terms of network CapEx, we already started investing this year. That will be what I will share as well.

Okay. And the [indiscernible]?

Competition, competition. Okay. Yes. Well, I don't think this should -- well, I cannot necessarily predict my competitor, and then especially the [indiscernible] too be happy about this. I don't know what it would do differently. But then I would say, in terms of -- originally, there will be 5. And then just by APT didn't have the spectrum, and then they wouldn't be playing a disruptor role, right? But then now because they are sharing with our network, they certainly are no longer in the same league as the smaller telco here because they are using our premium network. So I think this should help with the competition. When you have less disruption, that will kind of -- that really shape the market more, right? So I think this should help stabilize a little bit. But then, again, I don't know other competitive moves by my competitors so -- but then I hope this is actually good. And this is why the NCC was advocating for spectrum sharing and all that. So hopefully, this will have better -- this is better for the market. Yes, better for our consumers because we definitely can spend more money on getting better served and better performance on network.

Now we're having Neale Anderson from HSBC.

My 2 questions, please. One relates to spectrum sharing between 4G and 5G. So I believe Far EasTone uses Ericsson, which is great to be a little bit ahead with that. So is that something that your partner can access as well? And you mentioned sharing some of the properties. So perhaps you could just expand on that a little bit. And then the second question relates to possible joining [ out ] of seeing 5G services in the future. Is there any scope for that? Or do you think that's feasible?

I'm sorry. Can you repeat the second question?

Yes. The second question is about the potential for co-branding or co-marketing for 5G services in the future.

Okay. All right. Okay. Let me answer the second question first. Okay. So there's no plan to join marketing. These are still 2 different companies. And then also, when we start sharing the spectrum on the 3.5G, remember, our 5G network is NSA model. So it -- the 5G part is our network, but then the 4G will still -- will go back to their 4G network. So they are not exactly the same network. So this is a more canned architecture. So -- and then this is 2 different companies. Even later, we raised our percentage to 23.8%, it's still 2 different companies. So we won't do co-brand. We won't do joint marketing. We are still 2 separate independent companies. Okay? And then for the spectrum sharing, you are right. For the REM part, I'm totally using Ericsson for the whole nationwide. Unlike Chunghwa, Chunghwa in the north area, they use Ericsson, but then for the south and central, I think they use Nokia. So for me, all the REM network is Ericsson. For APT, they actually use both. And then depending on which spectrum. So -- and then because this is more canned. And the core was -- we will -- my network team will be discussing the architecture and then how to implement it. But then we do know Ericsson can support it. So we did check with our vendor. So that shouldn't be any issue.

Got it. Perhaps just one follow-up, if I may, relating to the calculation of operating cost. Is the traffic remain input for that calculation?

So when we talk about the OpEx, we are referring to running the stations, the utility, the rentals, the labor and all that. Now in terms of the network, right? So like we said, we are looking at the capacity -- the total capacity used by each. So 2/9, and then 7/9 are our allocated amount. If we -- if either party goes above their amount, then you pay the other party for the overage. So that part is -- so when I talk about OpEx, I was more talking about the operating cost incurred as our data centers or our network centers, and then monitoring of it.

Next one to ask question, Sara Wang from Morgan Stanley.

So I have 3 questions. So the first one is that, can you please help to clarify that? So since APT will pay Far EasTone over TWD 9 billion on the 3.5 spectrum licensing fee. So besides that, for further CapEx or OpEx spent on the 3.5 network, that will be split into like 2 versus 7 based on the ratio between Far EasTone and APT. So if that is the case, since like we Far EasTone keep the CapEx for 2020 unchanged, does that mean like APT will pay, first of all, 2/9 of Far EasTone's 2020 CapEx to Far EasTone? Or actually APT will like spend more on 5G CapEx? So actually, the overall total CapEx by APT and Far EasTone will be bigger than like previous guidance. And then second question is that it seems in the slides that Far EasTone thinks this deal will be EBITDA and EPS accretive after completion of all these share transactions. But it seems APT has been loss-making on -- for the past few years and also negative on free cash flow. So may I ask what's the rationale behind the -- like the positive cash flow projected or like EPS-accretive assumptions? And then finally, the third question is on the shareholding. So after all the transactions, Far EasTone will become the biggest shareholder together with Hon Hai in APT. so -- but does that mean Far EasTone will also have controlling power over APT? Or like something similar to that? If that is the case, then do we have any -- I don't know, do we have any kind of synergy with APT to actually both to save cost for both parties?

Okay. So let me answer first question about the CapEx. So the idea here is, as far as 5G network construction or deployment is concerned, it will be solely responsible by Far Eastern -- Far EasTone. So in terms of the CapEx, APT won't have their own -- they don't need to spend CapEx for 5G. But then they pay us in terms of the -- actually, its expense that they will pay. They don't spend capital for it. And then so for what I have already spent or plan to spend this year, all the CapEx related to 5G, they will pay 2/9 as they spend for them, okay? And then going forward, every year, so like next year, when I plan for my next year's capital investment in 5G, they will also pay 2/9. And then, of course, we take into account they may have special needs if that don't already get subsumed by my FET's needs, demands, if not covered. So we will take that into account as well in our capital plan, in our deployment plan. But then in terms of the capital, so we are the one to incur the capital investments or spending for 5G, and they just pay the expense for it, 2/9, okay? Did that answer your question, the first question?