Business Context and Reporting Period
Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Full year ended December 31, 2007 (with comparative data for 2006 and 2005).
Filing Date: March 27, 2008.
Business Overview: Chunghwa is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and Internet/data services. The company completed its privatization in August 2005, with the Ministry of Transportation and Communications (MOTC) retaining a 35.25% stake as of December 31, 2007. The financial statements are prepared in accordance with US GAAP.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (NT$ Millions) | 2006 (NT$ Millions) | 2007 (US$ Millions) |
|---|---|---|---|
| Total Revenue | 200,911 | 186,342 | 6,195 |
| Net Income | 49,451 | 42,072 | 1,525 |
| Operating Income | 62,814 | 56,297 | 1,936 |
| EBITDA | 102,272 | 97,227 | 3,154 |
| Net Cash from Operating Activities | 87,248 | 100,151 | 2,690 |
| Cash and Cash Equivalents (End of Period) | 76,233 | 70,673 | 2,351 |
| Total Assets | 406,234 | 398,781 | 12,527 |
| Total Liabilities | 85,696 | 78,636 | 2,643 |
| Stockholders' Equity | 317,883 | 320,047 | 9,802 |
| Basic EPS (NT$) | 4.68 | 3.95 | 0.14 |
Note: US$ amounts are translated at the rate of NT$32.43 to US$1.00 as of December 31, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.8% year-over-year to NT$200.9 billion. Growth was driven by the consolidation of SENAO International Co., Ltd. (acquired in 2007), continued growth in Internet and data services (+5.8%), and mobile value-added services (+24.2%).
- Profitability: Net income rose 17.5% to NT$49.5 billion. This increase was fueled by revenue growth, effective cost controls (including a 27.4% reduction in handset subsidy expenses), and a decrease in income tax expense.
- Segment Performance:
- Mobile: Revenue grew 1.0% to NT$73.7 billion, supported by subscriber growth and VAS revenue. 3G subscribers reached 2.29 million.
- Fixed-Line: Revenue declined 0.6% to NT$62.6 billion due to mobile substitution, though International Long Distance (ILD) revenue increased 2.4%.
- Internet & Data: Revenue increased 5.8% to NT$49.2 billion, driven by broadband subscriber growth and speed upgrades.
- Cash Flow: Net cash provided by operating activities decreased 12.9% to NT$87.3 billion, primarily due to higher income tax payments.
- Capital Structure: The company executed a capital reduction plan in 2007, repurchasing and cancelling shares, reducing the outstanding share count to approximately 9.56 billion.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted strong annual results led by the SENAO acquisition and solid mobile business performance. The company noted a decline in EBITDA margin (from 52.2% to 50.9%) attributed to lower subsidiary EBITDA margins.
- Capital Expenditures: Capex for 2007 totaled NT$25.1 billion, with 76% allocated to wireline (fixed-line and Internet/data) and 21% to mobile equipment.
- Subsequent Events: In January 2008, the company acquired additional stakes in Spring House Entertainment Inc. (gaining control) and KingWay Technology Co., Ltd., and established a new subsidiary, Light Era Development Co., Ltd., for real estate development.
- Risks and Contingencies:
- Regulatory: The company is subject to extensive regulation by the National Communications Commission (NCC) and the ROC government.
- Competition: The telecom industry in Taiwan is intensely competitive.
- Legal: A pending litigation regarding land usage compensation with Taiwan Post Co., Ltd. (claiming NT$768 million) is ongoing; management does not believe the outcome will be material.
- Derivatives: The company utilizes forward exchange contracts and index futures to hedge currency and market risks, which resulted in a net loss of NT$856 million in 2007 due to valuation changes.
Investor Verification Checklist
- Acquisition Impact: Verify the specific contribution of the SENAO acquisition to the 2007 revenue and EBITDA figures, as this was a primary driver of growth.
- Fixed-Line Decline: Monitor the trend of mobile substitution affecting fixed-line revenue and the sustainability of International Long Distance growth.
- Derivative Exposure: Review the details of the foreign currency derivative contract with Goldman Sachs (entered Sept 2007) and its potential impact on future earnings given the valuation loss of NT$580 million in 2007.
- Capital Reduction: Confirm the final impact of the share buyback and cancellation program on the weighted average shares outstanding for future EPS calculations.
- Real Estate Venture: Assess the strategic rationale and financial risk associated with the new real estate subsidiary (Light Era Development) established in January 2008.