Taiwan Mobile Co Ltd
TWSE:3045
Earnings Call Analysis
Q4-2023 Analysis
Taiwan Mobile Co Ltd
In the year marked by robust performance across key sectors, Taiwan Mobile reported a 6% growth in consolidated revenue, reaching TWD 183.3 billion. This surge is driven by the trifecta of 5G, e-commerce, and home broadband services. The telecom sector outshined with a notable 8% growth, thanks largely to 5G subscriptions and more favorable 4G pricing. The successful acquisition of rival T Star has been pivotal in registering an impressive 11% year-on-year rise in net income for Taiwan Mobile.
The push towards 5G has been influential, with a jump in the average revenue per user (ARPU) to over TWD 700. Despite the T Star merger only concluding in December, the company has seen a 15% increase in mobile service revenue in Q4 '23. Thanks to the high renewal rates from 4G to 5G, Taiwan Mobile remains optimistic about its future ARPU growth, given that the 5G penetration in its smartphone postpaid user base was at 36% at the end of the year.
Taiwan Mobile's e-commerce front experienced moderate growth, maintaining a market edge despite shifts towards offline spending. With an expansion in logistics capabilities, especially the upcoming southern and central distribution centers, the company is set to reinforce its e-commerce dominance. The broadband sector is also thriving, with a 5% increase in subscribers who now opt for higher speed tiers, indicating an upsurge in demand for quality internet connectivity.
The financial health of Taiwan Mobile is undeniably strong, with a 4% increase in consolidated EBITDA to TWD 35.8 billion, and the company is reaping the benefits of its strategic investment in the music streaming sector. They are bearing fruit in the form of valuation gains and improved non-operating income. The company also took on T Star's debts resulting in a net debt to EBITDA ratio of 2.23x, but the increased assets from T Star’s spectrum holdings and momo's warehouse additions are optimistic signs for future growth potential.
To enhance value for its expansive 10 million subscriber base, Taiwan Mobile has forged exclusive partnerships with streaming giants like Disney+ and HBO GO. This strategy is expected to boost ARPU, reduce churn rates, and ultimately amplify customer loyalty. By catering to a diverse range of customer preferences, the company anticipates these alliances will contribute positively to its revenue streams, echoing Taiwan Mobile's commitment to keeping its customer base content and engaged.
Looking ahead to 2024, Taiwan Mobile is guiding a consolidated revenue growth between 12% to 14% and an 11% to 13% increase in EBITDA. This confidence is cushioned by the T Star merger and expected synergies. In line with this, they forecast an 18% to 20% growth in Telecom-related revenue. Despite a sizable capital expenditure planned for network maintenance and improvements, the company assures investors that these costs will not affect dividend payouts or cash flow. The total dividend payment has increased by roughly 6% from the previous year.
Concluding the year, Taiwan Mobile stresses on strategic focus areas, including synergy capture from the T Star merger, accelerated growth through capitalizing on increased scale, and business expansion into fields like AI and ESG. Their long-term commitment to technology and sports sponsorships reflects a broader agenda for societal impact. The company remains steadfast on delivering increasing value to shareholders while keeping scope for more growth and contribution towards sustainable development.
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Good afternoon, ladies and gentlemen. Welcome to the Taiwan Mobile's conference call. And our Chairperson today is Mr. Jamie Lin. And Mr. Lin, please begin the call, and I'll be on standby for the question-and-answer session.
Thank you, operator. Good afternoon, everyone. Welcome to Taiwan Mobile's Fourth Quarter 2023 Results Conference Call.
Before I start our presentation, let's first go over our disclaimer as per usual. Disclaimer, the information contained in this presentation including all forward-looking information is subject to change without notice whether as a result of new information, future events or otherwise. And Taiwan Mobile Co. Limited, or hereafter, the company, undertakes no obligation to update or revise the information contained in this presentation. No representation warranty or undertaking expressed or implied is or will be given by the company as to the adequacy, accuracy, completeness and correctness of the information contained herein. Financial numbers in this document may include preliminary audited numbers or management accounts.
All right. Now let's take a look at our business overview. Please turn to Page 4 for highlights of 2023. So in 2023, our consolidated revenue rose by 6% Y-o-Y underpinned by solid performance across our 3 core engines, namely 5G, e-commerce and home broadband. Mobile service revenue growth reached 8% Y-o-Y attributable to steady 5G conversion, improving 4G pricing environment and robust momentum in roaming and gaming-related revenues. Meanwhile, momo continued to outperform its peers and posted a 7% Y-o-Y growth in e-commerce revenue during the year.
Our home broadband subscribers went up by 4% Y-o-Y driven by effective cross-selling towards mobile and Pay-TV customers. Consolidated EBITDA rose by 4% for the year while net income saw an 11% Y-o-Y increase, thanks to strategic divestment and valuation gains along with merger-related tax benefits. Excluding these one-off factors, net income would still see a healthy 5% Y-o-Y growth.
Next, let's turn to Page 5 for a closer look at our mobile business. So throughout the year, we delivered solid results in our mobile business as we successfully implemented our sustainable growth foundation strategy. As you can see from the slide, smartphone postpaid ARPU increased to over TWD 700 in 2023. Please note that this includes a 1-month drag from the T Star merger, which was effective on December 1 last year. In 4Q '23, mobile service revenue increased by 15% Y-o-Y reaching TWD 14.12 billion. This was propelled by a 6% Y-o-Y growth in Taiwan Mobile's existing smartphone postpaid ARPU along with revenue contribution from T Star. These positive outcomes were driven by our unique bundles, effective upselling in contract renewals as well as the strong roaming and gaming revenues.
Upselling and low churn are the two pillars of our SGF strategy. We are pleased to see that the monthly fee uplift from 4G to 5G renewals increased to 48% in 4Q '23, aided by iPhone 15. With no more down trending -- I'm sorry, with no more down trading in 4G to 4G renewals, overall monthly fee uplift for all renewals remained steady at 10%. On the bottom right chart, you will see that 5G penetration in our smartphone postpaid user base was only at 36% in 4Q '23, which means there's still a long runway ahead for ARPU upside, especially for TST subscribers.
Adoption of our unique bundles namely momobile, Double Play, Disney+ and OP Life have continued to grow, which bodes well for customer loyalty. Excluding one-off churn from cleaning up dormant SIMs in December, our postpaid monthly churn rate remained low at 0.71% in 4Q '23. For OTT services, we have recently kicked off a new exclusive partnership with HBO GO, offering Taiwan Mobile users a special deal with 40% savings compared with the service standard pricing. We believe HBO GO's strong IPs will provide a tailwind to acquiring and retaining customers. which is in line with our SGF strategy.
Next, let's turn to Page 6 for updates on our e-commerce business. In 4Q '23, we saw moderate growth in our e-commerce revenue, albeit still outperforming peers. In addition to a high base, Taiwanese customers continued to shift spending towards off-line activities. That said, our e-commerce EBITDA margin remains resilient. On the logistics side, 3 warehouses were added during the quarter taking the total number of distribution facilities to 59, 5 more than a year ago. Total warehouse space increased by 22% Y-o-Y.
The southern distribution center will be up and running in a couple of months while the central distribution center will follow in 2023. This will expand the coverage area of our rapid delivery services and further widen our moat. As for momo coin and its ecosystem, we continue to focus on broadening its usability. By end of 4Q '23, our momobile user base has continued to grow and now contributes about 13% of momo's e-commerce revenue.
Next, let's take a look at our broadband business on the next page. In 4Q '23, the business unit's revenue and EBITDA were both resilient as we continue to focus on growing our cable broadband footprint. Steady demand for faster home connectivity as well as our cross-selling effort led to a 5% Y-o-Y increase in broadband subs. We focused on upgrading existing broadband users to higher speeds, and as a result, subscribers who opted for speeds of 300 mega bps or higher rose by 55% Y-o-Y during the year -- I'm sorry, during the quarter. While we currently rank as the #4 MSO player with an 11% footprint for cable TV services, we have expanded our cable broadband coverage to 85% by teaming up with most of the leading MSOs in the country via our Double Play bundles.
Now let me pass the virtual mic to our CFO, George Chang, for a financial overview.
Thank you, Jamie, and good afternoon, everyone. Let's start with the performance by business. In 2023, consolidated revenue rose by 6% to TWD 183.3 billion. That's another record high. Telecom and momo each contribute about half of that revenue growth. As for profitability, consolidated EBITDA increased by 4% to TWD 35.8 billion in 2023. On the back of further upselling, roaming recovery, gaming momentum and T Star's contribution, Telecom business stood out and account for the majority of the EBITDA increase.
Let's go to our results summary. With a healthy performance in our 3 core engines: 5G, e-commerce and home broadband, along with T Star's contribution in December, consolidated revenue rose by 6% Y-o-Y in Q4 '23. With a 14% Y-o-Y growth in telecom service revenue, Telecom's EBITDA and consolidated EBITDA went up by 11% and 9% Y-o-Y, respectively, in 4Q '23. D&A increased quarter-on-quarter and year-over-year during the quarter given the ongoing network consolidation amid the merger with T Star as well as momo's warehouse additions. Despite the Y-o-Y increase in financing costs, disposal gains from sales of our music streaming business and valuation gain from divestment led to a significant improvement in the nonoperating income for both 4Q '23 and FY '23. Coupled with merger-related tax benefit, our 2023 EPS grew by 11% Y-o-Y to TWD 4.33, a 4-year high.
Let's move to our balance sheet. Starting from assets. Both long and short-term contract assets increased with higher monthly fee contribution from our mobile bundle plans and the inclusion of the T Star users. Similarly, PP&E fixed assets increased due to the acquisition of mobile equipment from T Star. Concession surged as we took on T Star's spectrum holdings, particularly the 3.5 gigahertz band for the 5G services. Right-of-use assets also grew on the back of momo's warehouse additions and the merger with T Star.
As for liabilities, long-term borrowings increase as we complete a syndicated loan by the end of 2023 to reduce the reliance on short-term borrowings. The hikes in paid-in capital and capital surplus resulted from the issuance of 204 million common shares to T Star shareholders. Net debt to EBITDA rose to 2.23x as we took on T Star's debt. Considering the incremental EBITDA expected from the merger, gearing ratio should stabilize before tapering off at a healthy pace.
Lastly, let's look at the cash flow. Cash earnings rose 21% year-over-year in 4Q '23 on the back of solid EBITDA growth in our Telecom and e-commerce business as well as positive contribution from T Star. Investing cash flow turned to inflow in 4Q '23, mainly due to a TWD 1.7 billion cash influx resulting from a merger with T Star, which was booked under investing cash flow. 2023 cash earnings show steady Y-o-Y growth while operating cash flow declined, mainly owing to e-commerce-related working capital change.
The drop in 2023 investing cash outflow reflected a TWD 2 billion Y-o-Y decrease in momo's CapEx payments as well as a reduction in our investment. Financing cash outflow increased Y-o-Y as we paid off more short-term borrowings. With stable Telecom CapEx and much lower momo CapEx, 2023 cash CapEx fell by 16% Y-o-Y. Full year free cash flow rose to TWD 16.43 billion, translating into an annualized free cash flow yield of 5.5%.
Let me turn the presentation back to Jamie for event updates and key messages.
All right. Thank you, George. First, let's talk about 2023 earnings distribution on Page 14. So on February 21, Taiwan Mobile's Board approved the proposal to distribute TWD 13 billion in cash dividends, translating to approximately 4.4% yield to shareholders. Dividend per share is TWD 4.3 on 3.025 billion shares excluding treasury shares held by 100% owned subsidiaries.
Next, let's take a look at our 2024 guidance on Page 15. For the full year, we're guiding consolidated revenue growth at 12% to 14% Y-o-Y with Telecom-related revenue growing at 18% to 20%, aided by T Star merger, of course. Consolidated EBITDA is expected to grow at 11% to 13% as it will take 12 to 14 months to complete network consolidation. The incremental EBITDA might not completely offset the additional D&A costs from the T Star this year. That said, the D&A has little impact to our cash flow and our ability to maintain consistent dividend payout. We are also confident that our greater scale and additional cost savings from healthier industry dynamics will pave the road for more growth in the years ahead.
For 2024 CapEx budget, a total of TWD 8.55 billion was approved by the Board. This is a 45% Y-o-Y reduction in Board-approved CapEx plans. Both Telecom and momo's CapEx budget went down Y-o-Y as 2023 was the high base, given the CapEx for T Star merger network integration and momo's central distribution center. Cable TV's investment for broadband growth will continue at a steady pace.
Next, I'm pleased to share our ESG achievements this quarter on Page 16. We are honored to be selected for the Dow Jones Sustainability World Index for the seventh consecutive year, ranking in the top 3 amongst global players -- global telcos and included in the DJSI Emerging Markets Index for the 12th consecutive year. Furthermore, we also received the SGS Carbon Management Award and the National Sustainability Development Award, showcasing our dedication to environmental stewardship. Alongside these achievements, we continue to receive acknowledgments for our long-term commitment to sports sponsorships.
Finally, on Page 17. To wrap up our presentation for today, here is the key message we would like for you to take away with. Key message, Taiwan Mobile delivered strong top line and EBITDA growth in our core telecom business throughout 2023, underscored by the successful completion of the T Star merger. Now as the clear #2 player with a robust 10 million user base, we are poised to maximize shareholder value.
Our strategic focus centers on: number one, synergy capture, vigorously realizing the full potential of our merger; number two, accelerated growth, propelling our SGF flywheel by fully leveraging our expanded scale; number three, business expansion, capitalizing on our Telco+Tech capabilities to serve our larger customer base and seizing new business opportunities in AI and ESG. We're confident that this strategy will the next wave of Taiwan Mobile's growth and value creation.
All right. With that, let's open the floor for questions. If you are participating online, you're welcome to send your questions via the chat box. We will begin by addressing the telephone line questions before moving on to the web. So operator, please go ahead.
[Operator Instructions] Our first questions come from Neale Anderson with HSBC.
Two questions, please. First one is on EBITDA relating to the T Star merger. So you said it may not -- the incremental EBITDA may not offset the higher D&A this year. Can I ask if you're still aiming at TWD 18 billion in incremental EBITDA from the merger over 3 years? Obviously, that was set 2 years ago, so I understand quite a lot has changed then. But I'd be interested to get your view on that. That's the first question.
The second one relates to CapEx. So there's a decline in Telecom CapEx. But one thing you mentioned last year, I think, was that there would be additional capital costs relating to the dismantling of the T Star base stations. And I think you've got approval from the Board for higher CapEx. So what has changed there, if that understanding is correct?
Neale, this is George. Maybe let me take on the first question. Yes, we did give that guidance a couple of years ago when we first announced the deal. And you're right, a lot of things have changed over the past 2 years. But throughout the past 2 years, we have also mentioned that even there has been a delay by regulatory, we have more confidence that we should still be able to realize the EBITDA synergies.
And today, I think we can share with you that we are still confident of saying that. But please do bear in mind that the number is spread over 3 years. So at this moment, I cannot tell you how much will be recognized this year or over the next -- or the next year or the year after. But yes, we are pretty confident that if you look on a 3-year basis or even a 2-year basis, the numbers are largely on par with what we said 2 years ago. So the answer is yes.
And then in terms of the CapEx for integration, I think largely the CapEx needed for integration was approved last year. And so this year's CapEx that we sort of asked the Board to approve are for ongoing network maintenance and improvement needs, mostly.
[Operator Instructions] Mr. Lin, we don't have questions from the audio side at this point of time.
Well, let's look at the chat box really quick. Give us one second.
All right. So let's move on to the chat box. There's a question from MoneyDJ News [ Rob Lau ]. Says Jamie, George, I'm quite interested to know more about Taiwan Mobile's cooperation with Disney+ and HBO GO, which are both gigantic online media streaming services. Would that not undermine your cooperation with the other? How is Taiwan Mobile playing out from here? How could we expect the inward revenue changes after Taiwan Mobile added HBO GO into your service pack? Will this get reflected on the ARPU? Thanks, [ Rob ]. Thank you, [ Rob ], for the question. So yes, both are sort of international media giants, and we're really honored and really pleased to be working with both of them sort of on a pretty exclusive manner. And truth be told, we did a study on our user base. Yes, there are some overlaps between customers that are using these services, but largely, people have different preferences. Some people would like to watch more Mickey Mouse and Marvel. Some people would like to watch more Game of Thrones and DC. So because after the T Star merger, we're now serving a gigantic 10 million subscriber user base, so we'd like to give our customers options.
And so if they do prefer Disney+, we want them to be able to get it at a reasonable price through our programs. And if some of the others prefer HBO GO, I want them to shop with us to get it. So yes, these 2 services are going to be sort of accretive to our revenues and they will also be positive to our ARPU. And based on our study, I think they are also going to be helping to lower our churn rate and increase our customer loyalty. And above all really, we want our 10 million customers to be as happy as they can be with us. So I hope that answers your question.
So we have another one from BofA Securities, Brooksley Kang. How should we look at dividend payout ratio into coming years as we're underway to unlock business synergy?
Well, Kang, this is George. I cannot speak for the Board, but as said, I think Neale was asking what's our EBITDA accretion over the next few years. And we also made it clear that it's still pretty much on par with what we announced. And as you can imagine, EBITDA does translate to cash flow or, i.e., cash payment ability. And I think Jamie earlier also said that despite the increased D&A cost, that doesn't really affect our cash payment or our dividend payment ability.
So ideally, we can see an increase as synergies materialize. But at this moment, I cannot speak for the Board. Again, for this year, we maintained the TWD 4.3. But if you look at the total payment, because of more shares being issued, the total payment -- the total amount is actually about almost 10% -- well, actually no, 6% more than last year already.
Brooksley, hope that answered your question. I guess that's all for online questions. Operator, do we have more questions from the telephone line?
Yes, we do have questions. And the questions come from Neale with HSBC.
I have another two, please. The first one is on the nonoperating income and expenses. So as you said, you had a positive in the fourth quarter and it was flattish year-on-year. So I wonder if you have any view on that line for 2024.
And the other one again relates to the T Star merger. Are you able to update on when you might be able to refinance the T Star borrowing and what impact that might have? And also any outlook on tax given the use of tax loss carryforward?
Okay. Neale, let me take that one, too. For the nonoperating, yes, you are correct. In 2023, one of the big nonoperating items was the disposal gain from our music business that we sold to KKCompany. So this year -- again, that's why that's off a high base and we're not going to see that this year. Another big swing in 2023 was the rising interest rate which resulted to higher interest payments. And we probably have seen the worst of the interest rate hike, let me say it this way. So even if there is an increase on the apple-to-apple basis, the magnitude is probably not going to be as bad as last year.
But of course, since we're adding new debt from T Star, so interest expense will still see an increase in absolute dollar terms this year and that's given. But that's somehow tied to the next question, are we doing any refinancing on T Star. Yes, of course. Since you mentioned the synergy part from 2 years ago, I'm sure you also remember that 2 years ago when we talked about synergies, we did make it clear that some of the synergies will be coming from the refinancing. And that's exactly what we have been doing and we are working hard on that. So -- and we have seen some good results so far.
And the tax outlook?
Sure. Let me just add more on the financing part. If you remember last year, I think it was the third quarter, we issued a governance bond for TWD 6.5 billion and our rate was like 1.56%, which is really, really low in today's environment. So that's all kind of things that we are doing right now to help achieve a more manageable interest payment.
Regarding loss carryforward tax benefit, yes, we recognized some in 2023 as well. So in terms of P&L impact it will be much less this year. So you are not going to see much of a loss carryforward tax benefit in 2024. And that's also one of the reasons that when we talk about net income Y-o-Y, there's a little bit distortion on a year-over-year basis with a high base.
So in terms of non-op income, I think we cannot rule out the possibility to have other non-op income this year. But just it's nothing that we're managing towards.
Yes. definitely. I mean, on the investment front we constantly review our portfolios. So we will look for divestiture or exit opportunities when suitable.
Thank you. Mr. Lin, we don't have questions at this point of time.
Great. If that's the case, let's wrap up today's session. Happy New Year, everyone. Hope to see you guys in 3 months. Thank you, operator.
Thank you. The conference call has been concluded. Thank you for your participation.