CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd. (NYSE: CHT)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter and First Half ended June 30, 2010
Business Overview: Taiwan's leading telecommunications service provider offering fixed-line, mobile, and Internet services. The company operates in a highly regulated environment under the National Communications Commission (NCC).

Key Financial Metrics (Consolidated)

Material Changes vs. Prior Period

• Revenue Growth Drivers: Consolidated revenue increased despite a mandated NCC tariff reduction effective April 1, 2010. Growth was driven by higher handset sales, increased mobile value-added services (VAS) revenue (+31.4% in Q2), and Internet services growth (+7.0% in Q2).
• Segment Performance:
  • Mobile: Revenue increased 6.5% (Q2) and 4.2% (H1) due to smartphone promotions and VAS growth. 3G subscribers reached 5.1 million (53.9% of total base).
  • Fixed Line: Domestic fixed revenue decreased 1.1% (Q2) and 2.0% (H1) due to mobile and VoIP substitution. However, broadband access revenue grew 1.9% (Q2) as customers migrated from ADSL to FTTx.
  • International: Fixed communications revenue decreased 2.3% (Q2) due to VoIP substitution and competition.
• Profitability: Net income growth was significantly boosted by a reduction in the corporate income tax rate from 25% to 17% effective January 1, 2010. Operating income remained stable due to prudent cost management.
• Costs: Total operating costs increased 4.9% (Q2) primarily due to higher handset sales costs and performance-based bonus accruals.

Guidance, Outlook, and Risks

• Management Commentary: Chairman Dr. Shyue-Ching Lu cited the continuing economic recovery and successful marketing initiatives as key factors. The company expects broadband revenue to increase over time as the migration to fiber solutions (FTTx) continues.
• Capital Expenditure (Capex): Q2 Capex was NT$5.2 billion, a 7.8% decrease year-over-year. 63.1% was allocated to domestic fixed communications.
• Risks and Contingencies:
  • Regulatory: Subject to extensive regulation by the NCC, including tariff reductions.
  • Competition: Intense competition in the telecom industry and VoIP substitution affecting traditional voice revenue.
  • Legal: Ongoing litigation with Taiwan Post Co., Ltd. regarding land usage compensation. The Taiwan High Court ruled in April 2010 that Chunghwa must pay approximately NT$40 million in compensation plus interest; Chunghwa has appealed to the Supreme Court.
  • Investment: Significant commitments for telecommunications equipment acquisition (NT$18.2 billion) and land/buildings (NT$120 million).

Key Facts for Investor Verification

• Tax Rate Impact: Verify the sustainability of net income growth given the one-time benefit from the statutory tax rate reduction (25% to 17%).
• Subscriber Migration: Monitor the rate of migration from ADSL to FTTx and the associated ARPU changes to ensure broadband revenue growth offsets fixed-line voice declines.
• Smartphone Penetration: Track the 17% smartphone subscription rate and the 132% higher ARPU for smartphone users compared to the blended average.
• Legal Exposure: Review the status of the Supreme Court appeal regarding the land usage dispute with Taiwan Post Co., Ltd.
• US GAAP Reconciliation: Note that US GAAP Net Income for H1 2010 was NT$27.6 billion (vs. ROC GAAP NT$25.0 billion), primarily due to adjustments for deferred income recognition and pension plans.