China Unicom (Hong Kong) Ltd (CHU)

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Wall Street Breakfast

China Unicom Limited (CHU)
Q2 2007 Earnings Call
August 23, 2007, 5:00 AM ET


Xiaobing Chang - Chairman and CEO
Bing Shang - Executive Director and President
Jilu Tong - Executive Director and CFO


Xiaobing Chang - Chairman and Chief Executive Officer

Good afternoon ladies and gentlemen. On behalf of the management, I would like to welcome you to China Unicom's 2007 interim results announcement. First of all, let me introduce other members of the management team. Mr. Shang Bing, Executive Director and President; Mr. Tong Jilu, Executive Director and CFO. Today's presentation has three parts. First, I will share with you the main achievements of the company's first half and outlook for second half. Next Mr. Shang will review with the company's operating performance and Mr. Tong will then give you the analysis of the first half financial results. After that, we would be happy to answer questions you may have.

In the first half, with new changes in market environment, the company furthered business model transformation, strived to expand the market expansion, and make new progress in the world business development. Business and revenues showed continued growth; mobile value added service maintained a strong momentum. Costs and expenses were under effective control, resulting in continuous improved profitability and more solid balance sheet.

Total revenue reached RMB49.18 billion, up 5.1%; EBITDA RMB16.74 billion, up 8%; pre-tax profit RMB5.65 billion, up 38.9%; net profit RMB3.77 billion, up 34.6%; basic earnings per share increased RMB0.297. In the first half, the fair value change of the option part of US$1 billion convertible bonds the company issued in July 2006 was RMB1.64 billion. After considering the above fair value change, net profit reached RMB2.13 billion. Since the fair value change does not affect the company's operating performance and cash flow, the following analysis will not consider this factor.

In the first half, with the changes in tariff policy and market competition, the company emphasized on profitable growth, enhanced the marketing effort and realized continuous growth in business and revenue. Total cellular users reached to 151.63 million, up 12.2%. Total MOU reached 222.3 billion minutes, up 16.7%. Total revenue reached RMB49.18 billion, up 5.1%.

Mobile value-added service maintained a rapid growth. Compared with the same period of last year, short message service volume up 24.9%, ringback tone users up 39.5%, CDMA 1X users up 21.1%. Mobile value-added revenue reached RMB9.4 billion, up 17.4% and as a share of cellular service revenue increased to 21.1% from 18.6%.

The company has furthered business model transformation and achieved continuous control on costs and expenses through enhancing budget management and effective use of marketing expenditure. In the first half, total costs and expenses were up 1.9%, lower than growth rate in total revenue, and as a share of total revenue decreased to 88.5% from 91.3 % over the same period last year; of which marking expenses down 8.2%; as a share of total revenue decreased to 19% from 21.7% over the same period last year.

With the continuous revenue growth and effective control on cost expenses, profitability showed a continuous improvement in the first half. EBITDA year-on-year up 8%, pre-tax profit year-on-year up 38.9%, and net profit year-on-year up 34.6%. By the end of first half, the company's balance sheet became more solid. Compared with the year-end 2006, total interest-bearing debt down 29.5%, net debt down 32.7%, debt-to-cap ratio down to 18.5% from 24.4%.

Looking forward into the second half, the company will focus on following the five aspects of work -- strive to realize growth with quality through a better execution; further implement separation of GSM and CDMA marketing operations; further enhance network capacity and quality; continuously increase revenue share of non-voice business; strengthen international cooperation and further improve overall management capabilities.

Also, I'd like to take this opportunity to inform everyone that SKT noticed the company on August 20, 2007 of full conversion of US$1 billion convertible bonds at HK$8.63 per share. The company believes the conversion will consolidate a strategic alliance between SKT and the company, and deepen the cooperation of SKT and the company on mobile communication.

Now I would like to invite Mr. Shang Bing to present company's operating performance in the first half. Thank you.

Bing Shang - Executive Director and President

Thank you Chairman Chang. Now I'll present you the operating performance for the first half. In the first half, to respond to new changes in the market environment, the company adhered to its annual operative environment strategy and took serious measures. Those measures include separating marketing operations of GSM and CDMA; budgeting marketing expenditure in proportion to customer contribution; appropriately increasing CDMA handset promotion; responding rationally to changes in tariff policy and market competition. As a result, subscriber growth accelerated, subscriber acquisition quality further improved, and overall business recorded a continuous and healthy growth. Compared with the first half of 2006, GSM net adds are up 22.2%, CDMA net adds are up 41.8%. Marketing expenses per RMB100 service revenue for GSM, CDMA, and fixed line business down 6.8%, 12.9%, and 12.5% respectively.

GSM total MOU and revenue up 19.8% and 5.4%. CDMA's total MOU and revenue up 9.1% and 2.9% respectively. Fixed line total revenue and external revenue up 3.5% and 20.9% respectively.

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