CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2009 (First Half 2009) and Second Quarter 2009.
Business Overview: Chunghwa is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and Internet/data services. The company operates in a capital-intensive industry subject to significant regulation by the Republic of China (ROC) government.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total consolidated revenue decreased 3.7% year-over-year. Fixed-line revenue dropped 7.7% due to economic downturn and substitution by mobile/VOIP. Mobile revenue fell 2.9% despite a 3.0% increase in subscribers, as traffic reduction and competition offset subscriber growth. Internet and data revenue was nearly flat (-0.2%) due to tariff reductions on HiNet and ADSL services.
• Profitability Pressure: Operating profit declined 10.0% and EBITDA fell 8.0%, primarily driven by the revenue decrease. However, net income decline (4.2%) was less severe than operating profit due to a significant NT$2.7 billion valuation loss recognized in the prior year (2008) from a foreign currency derivative contract, which did not recur in 2009.
• Cost Management: Total operating costs and expenses decreased 0.7% to NT$68.1 billion. This reduction was driven by lower costs at the SENAO subsidiary and decreased depreciation. However, operating expenses increased 3.3% due to ERP compensation and G&A expenses related to new subsidiaries in Singapore and Japan.
• Cash Flow: Operating cash flow decreased 21.0%, attributed to lower revenue and the absence of a NT$3.2 billion income tax refund received in the prior year. Cash and cash equivalents decreased 12.5% due to cash payments from a previously completed capital reduction program.

Guidance, Outlook, and Risks

• Outlook: Management notes that the deteriorating economic environment and intense market competition continue to impact traffic and revenue. However, the company is seeing progress in mobile subscriber growth (3.0% increase) and strong growth in mobile Value-Added Services (VAS) revenue (+18.5%).
• Strategic Initiatives:
  • FTTx Expansion: FTTx subscribers grew significantly to 1.34 million (from 0.78 million in 1H 2008), offsetting declines in ADSL subscribers.
  • Early Retirement Program: An early retirement program was initiated in the second half of 2009 with 240 participants. While incurring NT$300 million in compensation costs, the company expects cost savings for the remainder of the year.
• Risks and Contingencies:
  • Legal: Giga Media filed a civil action alleging patent infringement regarding PPPoE technology, seeking NT$500 million in damages. The case is in the first instance.
  • Regulatory: The company faces extensive regulation in the telecom industry and potential disruptions from natural or human-induced events.
  • Financial Instruments: The company holds significant available-for-sale financial assets and has recognized impairment losses of NT$85.3 million in 1H 2009 due to global economic conditions.

Key Facts for Investor Verification

• Revenue Mix Shift: Verify the sustainability of mobile VAS growth (up 18.5%) as a counterbalance to declining fixed-line and mobile voice revenues.
• FTTx vs. ADSL Transition: Monitor the rate of FTTx subscriber acquisition versus ADSL churn to assess the success of the broadband infrastructure upgrade strategy.
• Capital Reduction Impact: Confirm the long-term impact of the capital reduction program (cash distribution to shareholders) on liquidity and future dividend capacity.
• Legal Exposure: Track the status of the Giga Media patent infringement lawsuit and potential financial impact.
• US GAAP Reconciliation: Note that US GAAP net income for 1H 2009 was NT$25.3 billion (vs. ROC GAAP NT$22.6 billion), primarily due to differences in revenue recognition for prepaid cards and connection fees, and tax treatments.