CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Accounting Basis: Republic of China (R.O.C.) GAAP, with reconciliations to U.S. GAAP.
Overview: Chunghwa Telecom is Taiwan's largest integrated telecommunications service provider, offering fixed line, cellular, and Internet/data services. The company was privatized in August 2005. As of December 31, 2008, the Republic of China government (via the Ministry of Transportation and Communications) held approximately 35.29% of outstanding common shares.

Key Financial Metrics (R.O.C. GAAP)

Note: US$ amounts translated at NT$32.76 = US$1.00 (Dec 31, 2008 rate).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.2% to NT$201.7 billion, driven by growth in Internet/data services, cellular phone sales (Senao subsidiary), and "All Others" segments. This offset declines in fixed line and cellular service revenues.
• Profitability Decline: Net income attributable to the parent decreased 6.6% to NT$45.0 billion. Operating income fell 3.0% to NT$58.6 billion. Margins compressed due to increased operating costs and regulatory tariff reductions.
• Segment Performance:
  • Fixed Line: Revenues declined 3.4% due to traffic migration to cellular and broadband services.
  • Cellular Services: Revenues declined 1.8% due to deteriorating macroeconomic conditions reducing call volumes, despite a slight increase in outgoing traffic.
  • Internet & Data: Revenues increased 1.7%, driven by data services and migration to FTTx (Fiber-to-the-x) from ADSL.
  • Cellular Phone: Revenues surged 24.1% due to full-year consolidation of Senao and increased 3G handset sales.
• Cost Structure: Operating costs increased 6.5% primarily due to the consolidation of Senao's cost of goods sold. Personnel expenses decreased slightly due to early retirement programs.
• Accounting Changes: Beginning in 2008, employee bonuses were recognized as an expense rather than an appropriation of earnings, impacting net income by NT$1.3 billion. Additionally, cost allocation methods for non-regulated services were changed, affecting segment reporting.

Guidance, Outlook, Risks, and Unusual Items

• Outlook & Strategy: Management expects capital expenditures to rise to approximately NT$30.9 billion in 2009 to fund Next Generation Network (NGN) migration, 3G expansion, and FTTx build-out. The company aims to maintain a dividend payout ratio of approximately 90% of net income.
• Regulatory Risks:
  • Tariff Reductions: The National Communications Commission (NCC) mandated continuous tariff reductions (approx. 4.88% to 5.35% annually) for fixed line, cellular, and ADSL services through 2010.
  • 2G License Expiry: Licenses for 2G cellular services expire in 2012 and 2013; renewal is not guaranteed.
  • Foreign Ownership: Direct foreign ownership is capped at 49%, with total direct and indirect holdings capped at 55%.
• Market Risks: Intense competition in fixed line, leased line, and cellular markets; potential disruption from natural disasters (earthquakes/typhoons) as the company carries no insurance for business interruption or natural disaster damage; and exposure to global economic recession affecting consumer spending.
• Unusual Items:
  • Impairment Losses: Recognized NT$1.14 billion in other-than-temporary impairment losses on equity portfolio investments due to the global financial crisis.
  • Legal Proceedings: A court judgment in March 2009 reduced a land usage compensation claim from Chunghwa Post Co., Ltd. to NT$16.9 million (down from an initial claim of NT$768 million).

Key Facts for Investor Verification

• Government Ownership: Verify the current percentage of shares held by the Ministry of Transportation and Communications (approx. 35.29% as of April 2009) and the implications of the Statute of Chunghwa Telecom Co., Ltd. on corporate governance.
• Dividend Policy: Confirm the proposed dividend for 2008 (expected to be declared in June 2009) and the company's ability to maintain its historical ~90% payout ratio amidst capital expenditure needs.
• Regulatory Tariff Caps: Monitor the NCC's enforcement of mandated price reductions and any new price control measures for 2009 and beyond.
• 2G License Renewal: Track the status of 2G spectrum license renewals scheduled for discussion in late 2009, as failure to renew could materially impact the cellular business.
• US GAAP Reconciliation: Review the significant differences between R.O.C. GAAP and U.S. GAAP, particularly regarding property revaluation, pension accounting, and the treatment of employee bonuses, which result in lower reported equity and net income under U.S. GAAP.