Business context and reporting period
Chunghwa Telecom Co., Ltd. is Taiwan’s largest integrated telecommunications provider, offering fixed-line, mobile, internet, international communications and ICT services. This Form 20-F is an annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. Consolidated financial statements were prepared under IFRS as issued by the IASB and reported in New Taiwan dollars.
- Outstanding common shares: 7.757 billion; each ADS represents 10 common shares.
- The ROC government, through the Ministry of Transportation and Communications, owned approximately 35.29% at year-end.
- 5G services launched June 30, 2020; 5G spectrum payments totaled approximately NT$48.4 billion.
Financial results and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | NT$207.6 billion | NT$207.5 billion | Flat |
| Operating income | NT$42.4 billion | NT$40.7 billion | +4.2% |
| Income before tax | NT$42.8 billion | NT$41.9 billion | +2.3% |
| Net income | NT$34.7 billion | NT$33.9 billion | +2.3% |
| Net income attributable to parent | NT$33.4 billion | NT$32.9 billion | +1.4% |
| Basic EPS | NT$4.31 | NT$4.25 | +1.4% |
| Gross margin | 34.0% | 34.0% | Stable |
| Operating margin | 20.4% | 19.6% | +0.8 percentage points |
| Net margin attributable to parent | 16.1% | 15.9% | +0.2 percentage points |
| Operating cash flow | NT$74.5 billion | NT$72.4 billion | +2.8% |
| Capital expenditures | NT$23.5 billion | NT$24.2 billion | -2.9% |
At December 31, 2020, total assets were NT$506.2 billion, total liabilities were NT$118.9 billion and equity was NT$387.3 billion. Working capital was NT$8.6 billion. Cash and cash equivalents were NT$30.4 billion.
- Net cash used in investing activities was NT$68.3 billion, primarily reflecting approximately NT$47.4 billion paid for 5G spectrum.
- Net cash used in financing activities was NT$9.8 billion, including NT$32.8 billion of dividends paid, offset by bond issuance and short-term bills payable.
- Debt included NT$7.0 billion of commercial paper, NT$20.0 billion of unsecured bonds and approximately NT$1.7 billion of loans, excluding lease liabilities. Unused unsecured and secured credit facilities were approximately NT$66.3 billion and NT$1.6 billion, respectively.
- Proposed 2020 cash dividend was NT$4.306 per share, subject to shareholder approval, representing a stated payout ratio of approximately 99.99% under Taiwan IFRSs.
Material changes versus the prior comparable period
- Domestic fixed communications revenue increased 5.7% to NT$69.5 billion, driven by ICT projects, broadband access and MOD services. Segment income before tax increased 15.2% to NT$22.5 billion.
- Mobile communications revenue declined 5.5% to NT$90.2 billion. Mobile service revenue fell to NT$56.7 billion, primarily because of lower roaming revenue during COVID-19 travel restrictions and competitive pricing. Handset and device revenue declined 9.7% to NT$32.1 billion.
- Internet revenue increased 6.7% to NT$32.1 billion, supported by IDC, cloud, IoT, cybersecurity, HiNet and HiLink services. Segment income before tax increased 4.8% to NT$13.1 billion.
- International fixed communications revenue declined 24.3% to NT$8.7 billion. International long-distance telephone revenue fell 66.5% to NT$1.5 billion, reflecting the strategy to reduce low-margin wholesale traffic and the pandemic’s effect.
- Operating costs increased 0.8% to NT$137.0 billion, while operating expenses declined 3.2% to NT$29.8 billion, primarily from lower marketing costs.
- Other income and expenses shifted from a NT$0.1 billion net expense to NT$1.6 billion of net income, mainly due to asset revitalization and disposal gains.
- Intangible assets increased to NT$90.3 billion from NT$47.0 billion, mainly because of the 5G concession. Total liabilities increased by approximately NT$26.1 billion, principally due to the new bond issuance and short-term bills.
Guidance, outlook, risks and unusual items
Management’s 2021 strategy emphasizes 5G expansion, FTTx upgrades, cloud, IDC, cybersecurity, IoT, digital transformation and cost optimization. Planned 2021 capital expenditures are approximately NT$43.1 billion, including NT$15.7 billion for mobile communications and NT$14.7 billion for domestic fixed communications. Management expects to fund these investments primarily with operating cash flow and bank loans.
- The NCC’s tariff-reduction programs continue through 2024, and mobile interconnection rates are scheduled to decline from NT$0.525 per minute in 2021 to NT$0.443 per minute in 2023. These reductions may pressure revenue and pricing.
- COVID-19 reduced roaming revenue, handset demand and handset replacement activity. Management stated that it had not identified a significant financial-statement impact as of authorization of the statements, but continues to monitor the pandemic.
- Key operating risks include intense mobile and broadband competition, OTT substitution, regulatory restrictions, mandatory tariff reductions, cybersecurity incidents, earthquakes and typhoons, submarine-cable disruptions, geopolitical tensions and Taiwan-related political or economic uncertainty.
- Four submarine-cable breaks disrupted services in the Matsu Islands during 2020. The SJC2 submarine cable’s expected service commencement was delayed to the fourth quarter of 2022.
- The company does not carry comprehensive property or business-interruption insurance for earthquakes, typhoons or related disruptions.
- Chunghwa acquired control of International Integrated Systems, Inc. in July 2020; the acquisition contributed NT$1.35 billion of revenue and NT$68 million of profit after acquisition.
- Chunghwa invested approximately NT$4.19 billion for a 41.9% interest in Next Commercial Bank. NCB remained loss-making in 2020, and Chunghwa committed to provide financial support if specified financial or capital-adequacy difficulties arise.
- 2020 unusual items included a NT$1.428 billion gain on disposal of property, plant and equipment, a NT$151 million gain on investment-property disposal and a NT$27 million reversal of prior investment-property impairment. SENAO recognized a NT$9 million goodwill impairment.
- Remaining commitments included NT$26.8 billion for telecommunications inventory and equipment and NT$0.1 billion for land and buildings. There were no material off-balance-sheet arrangements reported.
- Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of December 31, 2020, and the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether 5G subscriber growth and monetization can offset declining legacy mobile, roaming and handset revenue.
- Whether the planned NT$43.1 billion of 2021 capital expenditures and high dividend payout remain compatible with cash generation and balance-sheet flexibility.
- The effect of future NCC tariff and interconnection-rate reductions on revenue, margins and competitive pricing.
- NCB’s funding requirements, path to profitability and the potential scope of Chunghwa’s financial-support commitment.
- The timing and cost implications of SJC2 and other submarine-cable projects, including exposure to geopolitical and physical-disruption risks.
- The sustainability of 2020’s operating-margin improvement, including the contribution from nonrecurring asset-disposal and revitalization gains.
- Differences between IFRS results used in the 20-F and Taiwan IFRSs used for dividend calculations.