Decent Q2 underlying performance, with improvement in fixed and Momo units.    Underlying EBITDA (excluding the impact of roaming and other one-offs) declined by1% YoY in Q2 – a solid performance relative to peers. A key driver was Momo, whichposted 15% growth in both revenue and EBITDA, on an improvement in ecommerce.    Fixed operational trends improved, with competition stabilizing. However,a one-time adjustment on CATV home shopping fees meant EBITDA declined 8%YoY on a revenue decline of 3%.    Mobile remains problematic: negative roaming impact should decline, butmarket is still soft. Taiwan Mobile saw a full quarter impact of the loss of APTroaming revenue, which began in February – 70% of APT’s traffic volume is nowback on its own network. TWM expects most of the effects to be realized by end2017 (partially offset by lower capex and capacity gains) but the underlying marketremains weak, with little evidence of migration to higher prices. TWM is executingwell, with more than half of contract sales in the quarter at TWD999 or above, but thiswas not enough to offset falling voice revenue and roaming revenue declines.    Trim forecasts and DCF-derived target price by 3%; maintain Hold. We trim our2018 and 2019 EBITDA forecast by 1.5-2.4%, reflecting a slower recovery in mobilethan previously forecast, resulting in a reduction in our DCF-derived target price toTWD111 from TWD113.6. TWM stock trades at 11.9x 2017e EBITDA and 19.2x2017e EPS.    Spectrum auction and a change in the mobile outlook are potential catalysts.    While reserve prices are higher for the 1.8GHz and 2.1GHz spectrum auctionscheduled for the fourth quarter, this does not necessarily entail higher prices. Thenew structure is designed to limit the extent to which operators end up with eachother’s spectrum (a problem in prior auctions). It is also designed to conclude fasterthan previous auctions. We estimate cTWD7.5bn in expenditure by each of the bigthree telcos. While amortization will increase from the date of service launch, weexpect the Taiwan telcos to maintain cost control on capex: despite high levels ofdata usage (still c15GB per month) network utilization is stable, due to effective useof low frequency spectrum, and re-use of existing BTS sites. A further catalyst ismobile re-pricing, but thus far this seems relatively unlikely.

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