Business Context and Reporting Period
This Form 6-K filing by Chunghwa Telecom Co., Ltd. covers events and financial updates occurring between March 14, 2011, and April 11, 2011. The company is a foreign private issuer based in Taipei, Taiwan, primarily engaged in telecommunications services. The filing includes unaudited financial results for March 2011 and the first quarter (January through March 2011), alongside various corporate announcements regarding investments, legal matters, and strategic expansions.
Key Financial Metrics
March 2011 Performance:
- Net Sales: NT$15.34 billion (up 4.9% year-over-year).
- Operating Income: NT$4.22 billion (up 2.8% year-over-year).
- Net Income: NT$3.86 billion (up 12.5% year-over-year).
- Earnings Per Share (EPS): NT$0.49 (up 40.0% year-over-year).
First Quarter 2011 (Jan-Mar) Performance:
- Net Sales: NT$47.58 billion (up 4.54% year-over-year).
- Invoice Amount: NT$45.19 billion (down 10.59% year-over-year).
Investment Activity:
- Acquired TaipeiFubon Bank 5th Financial Debentures for a total of NT$306,002,600.
- Planned investment in a joint venture in Zhejiang, China, for US$4.8 million.
- Total approved investment in mainland China to date: US$7 million.
Dividends:
- Board resolved to distribute a cash dividend of NT$5.5243 per share.
Material Changes Versus Prior Period
The primary driver for the increase in March 2011 revenue was a regulatory shift in pricing rights for fixed-to-mobile calls, which moved from mobile operators to fixed network operators. This change increased domestic fixed-line revenue by 14.9% year-over-year while decreasing mobile business revenue by 4.1%. However, growth in mobile value-added services offset the mobile revenue decline. When adjusted for interconnection and transition fees, mobile revenue would have shown a 4.7% increase.
Net income growth was further bolstered by proceeds from the disposal of fixed assets and a reduction in the corporate income tax rate from 25% to 17%. The significant 40% increase in EPS was attributed to higher net income and a capital reduction in January 2011 that decreased the weighted average number of outstanding shares.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook:
- Japan Earthquake Impact: The company announced that the March 11, 2011, earthquake in Japan had no material impact on its finance or business operations.
- Expansion: The company plans to establish a wholly owned subsidiary in mainland China (Chunghwa Telecom (China)) to provide ICT services with a capital of USD 6 million. Additionally, a joint venture for energy-saving services in Zhejiang, China, is planned.
- Strategic Moves: The Board resolved to deactivate the Shanghai office and establish a new office in Europe.
Risks and Contingencies:
- Legal Dispute: The company lost a lawsuit against the National Communications Commission regarding a transition fee for fixed-to-mobile call pricing. The Taipei High Administrative Court ruled in favor of the Commission. The company stated this loss would not affect current operations but is considering an appeal.
- Contract Termination: The lease contract for the Da-an Building with a 100% owned subsidiary, Light Era Development Co., Ltd., was terminated effective April 1, 2011, due to the subsidiary's business strategy adjustment. The company reported no financial effect.
- Investment Rumors: The company clarified reports regarding a potential investment in TMI-LABS, stating it follows internal evaluation processes and makes no comment on rumors until procedures are complete.
Important Facts for Investor Verification
- Verify the sustainability of the revenue growth driven by the regulatory shift in fixed-to-mobile pricing rights.
- Monitor the outcome of the appeal regarding the lost lawsuit on transition fees with the National Communications Commission.
- Track the progress and capital deployment for the new mainland China subsidiary and the Zhejiang joint venture.
- Confirm the impact of the capital reduction on future EPS calculations and share count.
- Review the financial implications of the tax rate reduction from 25% to 17% on future net income projections.