Chunghwa Telecom Co., Ltd. — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a quarterly filing; clear standalone 2017 Q4 results are not provided. Financial statements are consolidated and prepared under IFRS as issued by the IASB. Amounts are primarily in NT$; U.S. dollar translations use NT$29.64 per US$1.
Business context
Chunghwa Telecom is Taiwan’s largest integrated telecommunications provider, with domestic fixed communications, mobile, internet, international fixed communications and other businesses. It reported 7,757 million common shares outstanding at year-end and operates through the TWSE-listed common shares and NYSE-listed ADSs, with each ADS representing 10 common shares.
- 2017 revenue mix: mobile communications 48.1%, domestic fixed communications 31.3%, internet 12.7%, international fixed communications 5.9% and other businesses 2.0%.
- At December 31, 2017, the company had approximately 10.45 million mobile customers, including 8.0 million 4G and 2.5 million 3G subscribers.
- FTTx customers increased to approximately 3.55 million, while ADSL customers declined to approximately 0.92 million.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | NT$227.5bn | NT$230.0bn | Down 1.1% |
| Gross profit | NT$80.7bn | NT$82.4bn | Down 2.1% |
| Gross margin | 35% | 36% | Down 1 percentage point |
| Operating income | NT$46.7bn | NT$48.1bn | Down 2.9% |
| Operating margin | 20.5% | 20.9% | Down 0.4 percentage point |
| Net income | NT$40.2bn | NT$41.6bn | Down 3.5% |
| Net income attributable to parent | NT$39.0bn | NT$40.5bn | Down 3.7% |
| Net margin attributable to parent | 17.2% | 17.6% | Down 0.4 percentage point |
| Basic EPS | NT$5.03 | NT$5.22 | Down 3.6% |
| Operating cash flow | NT$70.9bn | NT$65.0bn | Up 9.2% |
| Capital expenditures | NT$26.9bn | NT$23.5bn | Up 14.3% |
Balance sheet and liquidity: Cash and cash equivalents were NT$28.8 billion, total assets were NT$450.9 billion and total liabilities were NT$81.5 billion at year-end. Short-term loans were NT$70 million and long-term loans were NT$1.6 billion. Unused credit lines totaled approximately NT$47.7 billion, comprising NT$45.7 billion unsecured and NT$1.9 billion secured facilities. Management stated that working capital was sufficient for present requirements.
Dividends: The board proposed a 2017 cash dividend of NT$4.796 per share, or approximately NT$37.2 billion, subject to shareholder approval. The filing states a 95.7% payout ratio based on Taiwan IFRSs after specified adjustments.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower mobile communications and domestic fixed communications revenue. Mobile business revenue fell 1.3% to NT$109.4 billion; domestic fixed communications revenue fell 2.3% to NT$71.1 billion.
- Mobile service revenue fell 2.6% to NT$75.8 billion, driven by lower voice revenue, while mobile value-added services continued to grow. Mobile ARPU declined from NT$598 to NT$595 per month.
- Local telephone revenue fell to NT$29.6 billion as traffic declined 12.1% to 8.3 billion minutes. Domestic long-distance revenue fell 7.6% to NT$2.6 billion.
- Internet revenue increased 2.9% to NT$28.9 billion, supported by IDC, HiNet, HiLink, information security and IoT services.
- International fixed communications revenue fell 6.1% to NT$13.6 billion, including a 16.4% decline in international long-distance revenue to NT$7.4 billion.
- Operating costs declined 0.5%, but operating expenses increased 0.1%. The company cited lower interconnection and depreciation costs, partly offset by higher ICT costs and cost of goods sold.
- Operating cash flow improved despite lower earnings. Investing cash outflow increased to NT$36.7 billion, largely because of the NT$10.9 billion payment for additional 4G spectrum and higher property, plant and equipment spending.
Guidance, outlook and management commentary
- Planned 2018 capital expenditures were approximately NT$33.1 billion, allocated mainly to fixed communications and FTTx expansion at NT$15.9 billion, mobile communications at NT$11.0 billion, internet at NT$3.3 billion and international fixed communications at NT$1.5 billion.
- Management expects to fund planned capital expenditures, dividends, debt repayment and other commitments primarily through operating cash flow and, to a lesser extent, bank loans.
- Strategic priorities include expanding FTTx and 4G capacity, developing MOD/OTT, cloud, information security, IoT, AI, Big Data and ICT services, and preparing for 5G opportunities.
- The 3G license expires on December 31, 2018, and the NCC does not plan to issue a replacement 3G license. The company expects to migrate customers to 4G, subject to regulatory discussions.
- The NCC’s tariff reduction plan applies through March 2020 to certain broadband, IP peering, leased-line and interconnection tariffs. Mobile interconnection rates are scheduled to decline from NT$1.15 to NT$0.571 per minute over four years beginning in November 2017.
- The filing does not provide a clear consolidated 2018 revenue or earnings guidance figure. It states that the company voluntarily publishes annual operating guidance, but the supplied filing text does not include a specific operating forecast.
Risks, contingencies and unusual items
- Intense competition, promotional pricing, unlimited data plans, cable operators, OTT providers and VoIP substitution may pressure customer growth, ARPU and tariffs.
- Regulatory changes could lower tariffs, increase obligations for a dominant provider, reduce barriers to entry and make network infrastructure deployment more difficult.
- Natural disasters, earthquakes, typhoons, network outages and cybersecurity incidents could disrupt service. The company does not carry comprehensive property or business-interruption insurance for these risks.
- The company recognized a NT$9 million goodwill impairment related to Youth and its subsidiaries, partly offset by an NT$11 million reversal of prior investment-property impairment. No 2017 property, plant and equipment impairment was recorded.
- Defined-benefit obligations increased materially: the funded deficit rose from NT$618 million at year-end 2016 to NT$2.7 billion at year-end 2017. Expected 2018 pension contributions were approximately NT$4.4 billion.
- Contractual obligations totaled approximately NT$12.8 billion, including NT$9.5 billion of operating leases, NT$1.6 billion of long-term loans and NT$1.6 billion of ST-2 satellite obligations. Additional commitments included NT$16.2 billion for telecommunications equipment and NT$1.6 billion for CHPT headquarters construction.
- The ROC government, through the MOTC and other government-controlled entities, held approximately 35.29% of outstanding common shares at December 31, 2017, and may exert significant influence over governance and strategic decisions.
- Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of December 31, 2017, and Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the annual FY2017 figures with any separately reported Q4 results; this Form 20-F does not present clear standalone quarterly data.
- Confirm shareholder approval and payment timing for the proposed NT$4.796 per-share dividend.
- Assess whether mobile ARPU, voice revenue and customer migration from 3G to 4G stabilize following the 2018 3G license expiration.
- Evaluate the earnings and cash-flow impact of the planned NT$33.1 billion 2018 capital expenditure program and additional 4G/5G investments.
- Monitor tariff reductions, interconnection-rate changes and the proposed Taiwan telecommunications regulatory reforms.
- Review the effect of IFRS 15, IFRS 9 and subsequent accounting changes on revenue timing, contract assets, equity and comparability.
- Verify the funding status of defined-benefit plans, pension contributions, equipment commitments and other contractual obligations.
- Assess cybersecurity, disaster recovery and insurance coverage given the company’s reliance on Taiwan-based network infrastructure.