Business Context and Reporting Period
Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Basis: Republic of China (R.O.C.) GAAP, with reconciliations to U.S. GAAP.
Overview: Chunghwa Telecom is Taiwan's largest integrated telecommunications service provider, offering domestic fixed communications, mobile communications, internet services, and international fixed communications. The company was privatized in August 2005, with the Republic of China government retaining a significant stake (approximately 35.29% as of December 31, 2009).
Key Financial Metrics (R.O.C. GAAP)
| Metric | 2009 (NT$ Billions) | 2009 (US$ Billions) | 2008 (NT$ Billions) | 2007 (NT$ Billions) |
|---|---|---|---|---|
| Net Revenues | 198.4 | 6.2 | 201.7 | 197.4 |
| Operating Income | 56.4 | 1.8 | 58.6 | 60.3 |
| Consolidated Net Income | 44.5 | 1.4 | 45.8 | 48.7 |
| Net Income Attributable to Parent | 43.8 | 1.4 | 45.0 | 48.2 |
| Basic EPS (NT$) | 4.51 | 0.14 | 4.64 | 4.94 |
| Operating Cash Flow | 77.3 | 2.4 | 91.9 | 89.0 |
| Capital Expenditures | 25.5 | 0.8 | 30.1 | 25.1 |
| Cash and Cash Equivalents (End of Period) | 73.3 | 2.3 | 81.3 | 76.2 |
| Total Assets | 449.0 | 14.1 | 463.6 | 469.6 |
| Total Liabilities | 70.0 | 2.2 | 83.9 | 71.8 |
| Equity Attributable to Parent | 375.2 | 11.7 | 376.6 | 395.0 |
Note: US$ amounts are translated at the rate of NT$31.95 = US$1.00 (December 31, 2009).
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 1.6% to NT$198.4 billion in 2009 compared to 2008. This was driven by declines in domestic fixed communications (due to traffic migration to mobile/VoIP and economic conditions), mobile communications (competition and handset sales decline), and international fixed communications.
- Profitability Pressure: Operating income fell 3.7% to NT$56.4 billion, and net income attributable to the parent decreased 2.8% to NT$43.8 billion. Operating margins compressed from 29.0% in 2008 to 28.4% in 2009.
- Segment Performance:
- Domestic Fixed: Revenues declined 2.2%. Local telephone traffic dropped 8.0% due to substitution by mobile services.
- Mobile: Revenues declined 2.6%. While mobile data revenues grew, handset sales revenues dropped 8.3% due to adverse economic conditions.
- Internet: Revenues increased 2.7% to NT$23.7 billion, driven by growth in value-added services (VAS) and internet other services.
- Cash Flow: Operating cash flow decreased significantly to NT$77.3 billion (from NT$91.9 billion in 2008), primarily due to a NT$4.0 billion pension fund payment made in December 2009.
- Capital Reductions: The company executed a capital reduction plan approved in June 2009, distributing NT$9.7 billion in cash to stockholders in February 2010.
Guidance, Outlook, and Risks
- Tariff Adjustments: The National Communications Commission (NCC) mandated tariff reductions effective April 1, 2010, through March 31, 2013. The formula requires reductions based on the previous year's consumer price index minus a set constant (4.816% for fixed line, 5.0% for mobile).
- Capital Expenditure Outlook: Planned capital expenditures for 2010 are approximately NT$31.4 billion, an increase from 2009, focused on FTTx network expansion, 3G/3.5G/3.75G mobile network upgrades, and Next Generation Network (NGN) projects.
- Key Risks:
- Regulatory: Extensive regulation by the NCC limits pricing flexibility. The company is designated as a "dominant" provider, subject to stricter tariff controls and interconnection requirements.
- Competition: Intensifying competition in fixed line, mobile, and broadband markets from new entrants and alternative technologies (VoIP, WiMAX) pressures tariffs and market share.
- 2G License Expiry: Licenses for 2G mobile services (GSM 900MHz and 1800MHz) expire in 2012 and 2013. Uncertainty remains regarding license renewal terms.
- Geopolitical: Political tensions between the Republic of China (Taiwan) and the People's Republic of China pose risks to the business environment and market stability.
- Technology Obsolescence: Rapid technological changes require continuous capital investment to avoid asset impairment and maintain competitiveness.
Investor Verification Checklist
- Revenue Mix Shift: Verify the continued decline in traditional fixed-line revenue and the growth trajectory of mobile data and internet value-added services to ensure long-term revenue stability.
- Tariff Impact: Assess the financial impact of the NCC-mandated tariff reductions effective April 2010 on future operating margins.
- 2G License Renewal: Monitor regulatory announcements regarding the renewal of 2G spectrum licenses expiring in 2012/2013 and potential costs associated with migration to 3G/4G.
- Government Ownership: Note that the ROC government holds approximately 35.29% of shares, which may influence strategic decisions and dividend policies.
- Capital Allocation: Review the execution of the NT$31.4 billion 2010 capital expenditure plan, specifically the ROI on FTTx and 3G network upgrades.
- Legal Contingencies: Monitor the outcome of the land usage compensation litigation with Chunghwa Post Co., Ltd., where a judgment of NT$23 million was rendered in April 2010 (subsequent to the reporting period).