CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2004 (with specific highlights for the third quarter).
Business Overview: Chunghwa Telecom is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and Internet/data services. The company is in the process of privatization, with the Ministry of Transportation and Communications (MOTC) reducing its ownership stake. As of September 30, 2004, the MOTC held approximately 64.94% of shares.

Key Financial Metrics

Figures are in New Taiwan Dollars (NT$) unless otherwise noted. Amounts in billions (bn) or millions (mn) are rounded.

Third Quarter 2004 Highlights

• Revenue: NT$46.5 billion (+0.3% QoQ).
• Net Income: NT$13.2 billion (-2.7% QoQ).
• EPS: NT$1.36 (US$0.40 per ADS).

Material Changes vs. Prior Period

• Revenue Mix Shift: While total revenue grew modestly (1.5%), the composition shifted significantly. Fixed-line revenue declined 7.1% YoY due to mobile substitution and migration to broadband. Conversely, mobile revenue grew 6.4% and Internet/data revenue grew 11.6%.
• Cost Management: Total operating costs and expenses decreased 0.2% YoY, driven by lower bad debt provisions and reduced depreciation/amortization. This cost discipline contributed to a 9% increase in net income despite flat top-line growth.
• Liquidity Improvement: Cash and cash equivalents more than doubled from the prior year period, aided by strong operating cash flows and a reduction in short-term borrowings (short-term bank loans and commercial paper were fully repaid or matured).
• Dividend Payout: The company paid cash dividends of NT$43.4 billion during the nine-month period, reflecting a commitment to shareholder returns.

Guidance, Outlook, and Risks

Management Commentary

Chairman Tan HoChen expressed satisfaction with results given the competitive landscape. The strategy focuses on maintaining profitability by concentrating on growing markets (Internet, data, and mobile) while implementing stringent cost controls. The company aims to increase shareholder returns in the fourth quarter and into 2005.

Key Growth Drivers

• ADSL: Subscribers increased 29% YoY to 2.9 million; 195,000 new subscribers added in Q3.
• Mobile: Subscribers reached 8.3 million (+4.0% YoY). The company holds a 36.2% subscriber market share.
• Internet: Total subscribers reached 3.8 million (+7.0% YoY).

Risks and Contingencies

• Regulatory Environment: As a former state-owned enterprise, the company is subject to extensive regulation by the ROC government and the Ministry of Transportation and Communications.
• Competition: Intense competition in the telecom industry, particularly in fixed-line and international long-distance services.
• Privatization: Ongoing privatization processes may impact governance and operational flexibility.
• Forward-Looking Statements: Actual results may differ due to economic conditions, natural disasters, or changes in government policy.

Investor Verification Checklist

• Fixed-Line Decline: Verify the sustainability of the 7.1% decline in fixed-line revenue and the rate of migration to mobile/broadband.
• Cost Control Sustainability: Assess whether the 0.2% reduction in operating expenses is a one-time benefit from lower bad debt provisions or a structural improvement.
• Capital Expenditure Trends: Confirm if the 23% drop in CapEx (NT$13.4bn vs NT$17.4bn) impacts future network expansion or maintenance capabilities.
• Dividend Policy: Review the impact of the NT$43.4 billion dividend payout on future liquidity and reinvestment capacity.
• Government Ownership: Monitor the progress of the MOTC's privatization plan and its potential impact on corporate governance.