CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2009
Filing Date: April 29, 2009
Accounting Basis: Republic of China GAAP (ROC GAAP), with US GAAP reconciliations provided.

Chunghwa Telecom is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and Internet/data services. Management reported that despite the adverse global economic environment, the company stabilized top-line performance by focusing on core services and expanding digital-converged services (broadband, mobile VAS, MOD/IPTV).

Key Financial Metrics (Consolidated)

Note: Revenue and Net Income figures are presented on a consolidated basis. EBITDA is a non-GAAP measure.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 3.6% year-over-year.
  • Fixed-line: Revenue dropped 8.9% due to economic downturn and substitution by mobile/VOIP.
  • Mobile: Revenue declined 3.1% despite a 2.9% increase in subscribers and an 18.5% surge in Mobile Value-Added Services (VAS) revenue.
  • Internet/Data: Revenue decreased slightly by 0.5% due to tariff cuts for ISP and ADSL services.
• Profitability: Net income remained relatively flat (+0.5%) despite revenue declines, driven by a decrease in income tax expense and an increase in non-operating income. However, EBITDA margins compressed significantly.
• Costs: Total operating costs and expenses increased 1.3%, primarily due to higher personnel expenses resulting from an increased ceiling on performance-based bonuses.
• Cash Flow: Operating cash flow decreased 13.6% due to lower EBIT. Free cash flow followed a similar downward trend.

Guidance, Outlook, and Management Commentary

• Guidance Change: Due to the global economic environment, decreased visibility, and market volatility, Chunghwa discontinued full-year 2009 guidance. The company will now provide guidance on a quarterly basis.
• 2Q 2009 Forecast (Non-Consolidated Basis):
  • Revenue: Forecast at NT$45.60 billion (up 0.86% QoQ, down 2.24% YoY).
  • Operating Profit: Forecast at NT$13.82 billion (up 0.38% QoQ, down 10.96% YoY).
  • EPS: Forecast at NT$1.11 (flat QoQ, down 13.94% YoY).
• Shareholder Returns: The Board approved a third round of capital reduction in 2009, estimated to return NT$9.7 billion to shareholders.
• Strategic Focus: Continued emphasis on maintaining market leadership in core services and expanding digital-converged services.

Risks and Contingencies

• Legal Proceedings:
  • 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 procedure.
  • Chunghwa Post Co., Ltd.: A court judgment required Chunghwa to pay NT$16.87 million plus interest for land usage compensation. Chunghwa intends to appeal.
• Regulatory: The company is subject to extensive regulation by the ROC government and the National Communications Commission (NCC).
• Market Risks: Exposure to foreign exchange rate fluctuations and intense competition in the telecom industry.

Investor Verification Checklist

• Revenue Mix: Verify the sustainability of Mobile VAS growth (up 18.5%) as a counterbalance to declining fixed-line and mobile service revenues.
• Capital Reduction: Confirm the execution and timing of the NT$9.7 billion capital reduction program to ensure shareholder value realization.
• US GAAP Reconciliation: Review the reconciliation of ROC GAAP to US GAAP (Exhibit 4), noting a net adjustment of NT$562 million reducing net income to NT$10.425 billion under US GAAP.
• Legal Exposure: Monitor the status of the Giga Media patent lawsuit and the Chunghwa Post land dispute for potential financial impact.
• Guidance Reliability: Assess the accuracy of the new quarterly guidance format given the stated economic volatility.