Business Context and Reporting Period
Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2009 (with specific Q3 2009 data)
Date of Filing: October 30, 2009
Accounting Basis: Republic of China GAAP (ROC GAAP), with US GAAP reconciliations provided in Exhibit 4.
Chunghwa Telecom is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and internet services. In Q3 2009, the company redefined its financial reporting from seven operating segments to five to align with global industry standards: Domestic Fixed, Mobile, Internet, International Fixed, and Others.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (NT$ Billion) | 2008 (NT$ Billion) | Change (%) |
|---|---|---|---|
| Total Consolidated Revenue | 147.2 | 151.9 | (3.0%) |
| Operating Costs & Expenses | 104.0 | 104.9 | (0.9%) |
| Net Income | 33.2 | 36.5 | (9.2%) |
| EBITDA | 70.6 | 75.6 | (6.6%) |
| EBITDA Margin | 47.9% | 49.7% | - |
| Operating Margin | 29.4% | 30.9% | - |
| Basic EPS | NT$3.42 | NT$3.77 | (9.3%) |
| Cash Flow from Operations | 49.5 | 56.0 | (11.5%) |
| Cash & Equivalents (End of Period) | 55.8 | 103.1 | (45.9%) |
| Capital Expenditures (Capex) | 16.6 | 18.4 | (9.7%) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 3.0% year-over-year, driven by an economic downturn and market competition.
- Mobile: Revenue down 3.9% to NT$64.6 billion due to decreased handset and data card sales from subsidiary Senao, despite a 3.5% increase in mobile subscribers.
- Fixed-Line: Domestic fixed revenue down 2.8% (local and long-distance traffic reduced by mobile/VOIP substitution). International fixed revenue down 3.8%.
- Internet: Revenue slightly up 0.4% to NT$17.2 billion, aided by value-added services (VAS) growth of 17.5%, offsetting tariff reductions.
- Profitability Pressure: Net income fell 9.2% to NT$33.2 billion. EBITDA and operating profit margins compressed slightly due to revenue declines and reduced interest income.
- Liquidity Impact: Cash and cash equivalents dropped 45.9% to NT$55.8 billion, primarily due to a cash dividend distribution of NT$37.1 billion and a capital reduction cash distribution of NT$19.1 billion in September 2009.
- Segment Redefinition: Beginning Q3 2009, the company consolidated its reporting segments from seven to five to improve transparency and align with international peers.
Guidance, Outlook, and Risks
Fourth Quarter 2009 Forecast
Management estimates the following for Q4 2009 (Non-Consolidated Basis):
- Revenue: NT$46.1 billion (down 1.3% YoY).
- EBITDA: NT$20.8 billion (down 0.3% YoY).
- Operating Profit: NT$11.9 billion (up 4.1% YoY).
- Net Income: NT$9.3 billion (up 9.6% YoY).
Management expects user traffic to increase due to economic recovery, leading to improved operating profit and net income despite flat revenue.
Management Commentary
CEO Dr. Shyue-Ching Lu noted that despite economic challenges, the company maintained or increased subscriber figures in core businesses (broadband and mobile). The company plans to accelerate fiber deployment and enrich MOD/IPTV content to sustain growth momentum.
Risks and Contingencies
- Regulatory & Competition: Intense competition in the telecom industry and extensive government regulation.
- Legal: An ongoing appeal regarding land usage compensation with Chunghwa Post Co., Ltd. (Court judgment reduced claim to NT$16.9 million; appeal pending). A patent infringement suit by Giga Media was withdrawn in October 2009.
- Financial Instruments: Exposure to foreign exchange rate fluctuations and market price risks on available-for-sale financial assets.
Investor Verification Checklist
- Subscriber Trends: Verify the sustainability of mobile subscriber growth (up 3.5%) amidst declining handset sales revenue.
- FTTx Migration: Confirm the rate of migration from ADSL to FTTx (Fiber to the x), which saw 165k net additions in Q3, as this impacts long-term revenue quality.
- Cash Position: Assess the impact of the significant cash outflow (dividends and capital reduction) on future liquidity and investment capacity.
- Segment Reporting: Review the new five-segment reporting structure to ensure accurate comparison with historical data.
- US GAAP Reconciliation: Note the significant adjustments between ROC GAAP and US GAAP regarding deferred income recognition and pension plans (Exhibit 4).