Taiwan Mobile Co., Ltd. (3045) Earnings Call Transcript & Summary

Good morning, good afternoon, ladies and gentlemen. Welcome to the conference call. Our chairperson today is Mr. Jamie Lin. Mr. Lin, please begin your call, and I will stand by for the Q&A. Thank you.

Thank you, operator. Good afternoon, everyone. Welcome to today's conference call. We're going to talk about Taiwan Star merging into Taiwan Mobile, a deal that was approved by both companies' Boards on December 30, 2021. Before we begin, please allow me to go over our disclaimer as per usual. The information contained in this presentation, including all forward-looking information, is subject to change without notice, whether as a result of new information, further -- future events or otherwise, and Taiwan Mobile Co., Ltd., hereafter the company, undertakes no obligation to update or revise the information contained in this presentation. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein nor is the information intended to be a complete statement of the company, markets or developments referred to in this presentation. All right. Let's start with a summary of the transaction on Page 3. Taiwan Mobile plans to issue circa 282 million new shares to the merged Taiwan Star, whose shareholders will own roughly 7.4% stake in Taiwan Mobile after the merger. After the merger is completed, Taiwan Mobile will be the surviving company. The transaction is subject to the approvals of the -- from the National Communications Commission and the Fair Trade Commission. Considering a lengthy closure would pose a significant adverse effect to the interest of end users, employees, shareholders and the industry as a whole, we are hoping that the regulators would give us a green light in a rather timely manner. Next, let's talk about rationale for the transaction. Please turn to Page 4. In summary, we believe the merger will bring Taiwan Mobile and our shareholders significant benefits in the following 5 areas: number one, greater scale; number two, end customer satisfaction number; number three, significant synergies; number four, earnings growth; and finally, healthy cash flow and financial flexibility. Next, let me provide you with more colors one by one. Page 5. Postmerger, we will have a strengthened position in the mobile industry with a 9.8 million mobile subscriber base and TWD 52 billion in annual mobile service revenues. The position will, in turn, substantially lift our economies of scale and CapEx efficiency. Customer satisfaction will be materially boosted with industry-leading per user 5G spectrum bandwidth our customers can enjoy. There will be less congestions and higher throughput for 5G applications. Integrating the 2 companies' 60 megahertz and 40 megahertz blocks on the 3.5 gigahertz spectrum will provide major impetus for 5G smartphone users and accelerate 5G vertical applications. As you can see from the lower right chart, 5G spectrum available to our mobile users is much higher than the industry average. Next, let's turn to Page 6 to talk about synergies. We expect close to half of the synergies to yield from network consolidation, followed by 30% from customer contribution and finally, 20% from rationalizing business operations. Network consolidation will result in significant OpEx savings, mainly from rental, electricity, transmission amendments. Once the merger is approved, we plan to shut down Taiwan Mobile's 3G network.

Taiwan Star's network.

I'm sorry, Taiwan Star's 3G network. In addition, we will methodically consolidate Taiwan Star's 4G network and remove redundant 4G base stations. At the same time, we will leverage Taiwan Star's 5G base stations to complement Taiwan Mobile's needs. The move will make our network management more efficient and help contain 5G CapEx. For customer contribution, our mobile service revenue will benefit from the ARPU lift through upselling Taiwan Star's users, mainly from 5G -- mainly from 4G to 5G, and through our Double Play, momobile, Disney+ and other offerings. The last leg of the synergy will stem from business streamlining with a big part of it coming from savings produced through refinancing Taiwan Star's debt. Next, let's turn to Page 7 to talk about EBITDA growth and gearing. Taiwan Mobile expects to see EBITDA increments of more than $18 billion postmerger. And as a result of cash generation, we expect our net debt to EBITDA to decline to a premerger level of 2.2x in the third year after the merger. As we deleverage, it will give us financial flexibility going forward. Now let's look at Page 8 for postmerger net profit. For the first 11 months of 2021, Taiwan Mobile reported unaudited consolidated net profit of TWD 10.15 -- TWD 10.15 billion. With the benefits from the synergies we expect to produce with this merger that we elaborated in previous slides, we expect the deal to add about TWD 2.3 billion in net profit for the company in the third year after the merger. Finally, let's turn to Page 9 to wrap it all up. Here is the future focus we would like for you to take away with. Propel future revenue and earning growth -- earnings growth. Cement Tower Mobile's position in the mobile business with ESG fulfillment. Accelerates Taiwan's 5G service proliferation and finally, targets total returns strategy. With that, I would like to now open the floor up for questions. Thank you.

[Operator Instructions] Our first question comes from Peter Milliken with Deutsche Bank Hong Kong.

And well done on helping move the industry towards consolidation. One question I have is about the unlimited customer, the lifetime unlimited customers on Taiwan Star. Can you tell us how many of those -- of its users are on lifetime deals and if there's any price associated with that? And the other one is just can we get the financials of T Star, like what were the revenues or EBITDA was in 2020, for example?

Thank you, Peter. Thanks for the kind words. In terms of lifetime unlimited customers, unfortunately, I cannot disclose their numbers here. But I can say that they are mainly 4G customers. So we will be looking to upsell them to 5G and/or our momobile, Double Play, Disney+ and all the other offerings. And we're pretty confident that we will be able to increase their ARPU while making sure they are happier with the products they're getting. In terms of T Star financials, I think you can find it in the appendix.

Our next question comes from Neale Anderson with HSBC Hong Kong.

Congratulations, great to see 5 going to 4. Two questions. The first is on the approvals from the FTC and NCC. Would it be fair to say that as Taiwan Star has relatively small market share, that it doesn't present any obvious obstacles to merger approval? Great to get your comments on that, on how this fits relative to guidelines for industry consolidation. And the second one is on the network side. In terms of the vendors, the equipment providers, are they similar between Taiwan Mobile and Taiwan Star or quite different?

Thank you for the questions. In terms of approval by NCC and FTC, like I said in the presentation, we think that if the approval process takes longer -- the longer the approval process would take, the more negative impact to end user, employee, shareholder and industry interest it would pose. So we're essentially begging the regulators to give us a more expedited sort of answer. In terms of vendors, both companies are 100% Nokia in terms of our base stations. So that would make synergy much easier to extract. Thank you.

Great. Just a follow-up, you mentioned to Peter that financials are in the appendix. I don't see them in any of the slides.

We will provide it right afterwards.

Right. All right.

It's a public company, actually. So...

[Foreign Language]

Sorry, because the Taiwan Stock Exchange Corporation does not provide you with English translation of the financials.

Yes.

We'll do it right away.

That's great. Thank you very much, Rosie.

Our next question comes from Sara Wang with UBS Hong Kong.

Congratulations on the deal. So I have 2 questions. First is that if I'm calculating everything correctly, it seems the consideration of this deal implies around 9 to 10x EBITDA for T Star. So just wondering, could you please provide any further color on the like reasoning behind? And second question is that given in the presentation, it seems both the free cash flow or EBITDA and earnings will be -- will increase after the merger. So just wondering if there's any potential upside in dividend or any change in the dividend policy.

Well, on the EBITDA multiples, we don't disclose the exact numbers to you, but we can say that with synergy, it's less than the multiple you just calculated. And on the dividend policy, as you can see that, given the healthy free cash flow, we don't find it difficult to maintain a stable dividend policy going forward. So I don't think it's a -- it's going to change or it will be a problem for us. So -- and also, it's been factored in, in our calculations of synergies. So I think it will be finally decided by the Board anyway. But based on our calculation, it's not a difficult situation for us.

Just one follow-up on the incremental EBITDA. So seems Taiwan Star, they have roughly like TWD 3 billion EBITDA in 2020. And then in the slides, it seems the incremental EBITDA after the deal would reach around TWD 7 billion in year 3. So when I take the difference between like TWD 3 billion and TWD 7 billion, as most of comes from the like synergy we just mentioned?

Yes.

[Operator Instructions] And our next question comes from [ Kash Somor ] with Fidelity Singapore.

Can you hear me okay?

Yes, you might want to speak a little louder. Thank you.

Okay. Yes. So just a quick question on the regulation side, right? What will be the key hurdle for this merger to get approved? And if my understanding is correct, in Taiwan, there is a regulation in terms of the spectrum market share, which is 1/3, right? And do you think this is going to be the case? And if -- and I guess, Taiwan Mobile/Taiwan Star will violate -- I mean will have more than 1/3 of the spectrum in the sub-1 gigahertz band, right, if my calculation is not mistaken. And in such a case, would you be okay to return part of your spectrum back to the regulator so that this merger can go through?

Thank you for the question. In terms of sub-1 G market share, to the limitation, the sort of text of the law describes that in a merger or buyout situation, the regulator can use their judgment to allow parties to hold spectrum sort of above that limitation. So there's a chance that, if we can make the case that the combined customer base needs certain capacity to have a good sort of telecom service quality, then there's a chance that we might be able to make that argument. But like I said, everything will be up to the regulator. So we will be looking to discuss proactively with them. And hopefully, we can make a good case for all of the stakeholders. In terms of other hurdles, it's pretty standard. So all the things you can expect from NCC and FTC.

Okay. That's very helpful. And my last question is, I would like to take a bit of a deeper dive into the synergies, right? And if I take a look at the first half results of Taiwan Star, they are still making a huge loss at the net profit level, right, about TWD 2 billion in the first 6 months of this year, right? And I understand there should be a lot of synergies from a telecom merger. But if you could just help me understand why you are not expecting any negative contribution even from year 1 despite the fact Taiwan Star is still making, on a run rate basis, probably about TWD 4 billion level of net loss, right? So what makes you believe there will be no negative contribution even from year 1 through this merger?

Thanks for your question. So like we said, the half of the synergy will come from the consolidation of network, and the consolidation of network is immediately executable. And also, the company will benefit immediately from it. So right at the merger, we'll immediately get to work and combine the networks. And so the month that we're able to consolidate base stations, immediately from the next month, we will enjoy the benefits. So we are pretty confident that the first year, we're able to extract enough synergies to make it -- make the impact to bottom line rather limited.

Okay. So in the synergies, you are not expecting a positive impact on ARPU, right? And so basically, you are only expecting cost synergy?

We're expecting 30% of the synergy coming from ARPU.

I'll check it. Okay. Sorry, I will -- yes. Okay. I will take a look at -- okay. This is consumer contribution which accounts for 31% of synergies?

Yes, that's 31%.

That's helpful. Okay.

And like I said also, in terms of debt refinancing, it's also immediately -- it can also be immediately executed and we will immediately benefit from it as well, yes.

And also to elaborate a bit, we also have tax benefits from loss carryforward from Taiwan Star.

Okay. Okay. I understand that. Sorry, just quickly on the last question. So in year 1, you are expecting, I don't know, maybe around TWD 4 billion to TWD 5 billion in incremental EBITDA on Page 7, right? So okay, this is what you're saying, right? Because now in the first 6 months, Taiwan Star's EBITDA is probably only around like TWD 1.5 billion, right? So -- no, no, no. About TWD 700 million to TWD 800 million. So if I annualize that, it's going to be about TWD 1.5 billion for the whole year of 2021. But thanks to the synergies, you are expecting the incremental EBITDA to be somewhere between like TWD 4 billion to TWD 5 billion from year 1. Is that correct understanding?

We can't share the exact numbers with -- yes. But as you can see from the chart, I think there will be substantial EBITDA increment.

So first of all, I want to point out that Taiwan Star's first half 2021 EBITDA is to the tune of TWD 1.4 billion.

TWD 1.4 billion? Okay. TWD 1.4 billion. Okay.

For half a year.

[Operator Instructions] And we have a follow-up question from Mr. Peter Milliken with Deutsche Bank.

On the subject of the network consolidation, you mentioned that you can quite quickly close down some of the redundant network. I'm assuming there would still be site leases that you would be locked into, though, for a period of time. Would they typically be 1-year leases or longer than that?

Yes, the leases are usually longer than that, but the penalty is usually much shorter than that. So meaning that you can get out of the leases through paying an x month worth of -- a month worth of rentals and get out of it.

And it has already been factored in, in our calculation of synergies, too.

I see. Okay. And if you're closing down the -- some of these base stations, is there then a depreciation write-off that we need to assume over and above the sort of net profit neutrality that you're forecasting?

Well, in year 1, we will add the PPA to do the so-called purchase price allocation to gauge the exact impact. But since we can realize some loss carryforward tax benefits, we expect the impact on the net profit will still be positive.

[Operator Instructions] And this is a follow-up question from Sara Wang with UBS.

Just one question on the spectrum. So for the 3.5 gigahertz spectrum, it seems Taiwan Mobile is not adjacent to Taiwan Star. So just wondering, going forward, will that be any incremental CapEx in terms of base station deployment?

That will be a negative. So our equipments are fully capable of sort of transmitting both of our 3.5 gigahertz spectrum holdings and same with the Taiwan Star 3.5 gigahertz equipment that we will obtain after the merger.

Got it. So that means for the existing base station, it can support spectrums from both Taiwan Mobile and Taiwan Star?

Yes. And in 2 to 3 years, we're expecting the industry to make intra-band carrier aggregation standards, meaning that we will be able to allow one single user or one single end device to use both lots of -- blocks of spectrum at the same time.

[Operator Instructions] Mr. Lin, there seems to be no further question at this point in time. Thank you.

That's great. Thank you, guys, for joining today's conference call. We wish you a healthy and happy 2022, and we look forward to seeing you again at our next installment.

Thank you, and Happy New Year.

Happy New Year.

Thank you. Thank you for your participation. This concludes the conference. Goodbye.