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, 2007
Filing Date: August 30, 2007
Auditor: Deloitte & Touche (Unqualified opinion on consolidated statements; reliance on other auditors for certain investees)
Chunghwa Telecom is a major telecommunications service provider in Taiwan offering fixed-line, cellular, Internet, and data services. The company completed its privatization in August 2005. During the reporting period, the company acquired a controlling interest (31.33%) in Senao International Co., Ltd. (SENAO) in January 2007, consolidating its results starting April 12, 2007.
Key Financial Metrics (Consolidated)
| Item (NT$ Thousands) | Six Months Ended June 30, 2007 | Six Months Ended June 30, 2006 |
|---|---|---|
| Revenues | $95,709,767 | $90,594,341 |
| Operating Costs | $49,815,887 | $45,601,157 |
| Gross Profit | $45,893,880 | $44,993,184 |
| Income from Operations | $31,653,347 | $29,592,526 |
| Consolidated Net Income | $24,706,225 | $22,187,273 |
| Net Income Attributable to Parent | $24,598,845 | $22,187,273 |
| Basic EPS (NT$) | $2.31 | $2.07 |
| Cash and Cash Equivalents (End of Period) | $82,369,585 | $63,206,044 |
| Total Assets | $478,935,376 | $469,328,946 |
| Total Liabilities | $87,684,321 | $92,305,703 |
| Total Stockholders' Equity | $391,251,055 | $377,023,243 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by approximately 5.6% year-over-year, driven by the consolidation of SENAO and continued service growth.
- Profitability: Net income increased by 11.3% to NT$24.7 billion. Operating income rose to NT$31.7 billion.
- Acquisition Impact: The acquisition of SENAO (telecommunication facilities sales) significantly impacted inventory levels, which rose from NT$1.3 billion to NT$4.3 billion, and increased operating costs.
- Dividends: The company declared a cash dividend of NT$3.58 per share for the 2006 fiscal year, resulting in a dividend payable of NT$34.8 billion as of June 30, 2007.
- Capital Structure: The company transferred capital surplus of NT$9.7 billion to common capital stock and resolved to reduce capital by an equivalent amount to return cash to shareholders.
- Debt: Total liabilities decreased slightly. The company repaid a NT$300 million loan from the Fixed-Line Fund in March 2007.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management notes that the telecommunications industry is capital-intensive, requiring significant capital expenditures to maintain competitive positions. A portion of earnings is retained to finance these expenditures.
- Legal Contingency: The company is involved in a lawsuit with Chunghwa Post Co., Ltd. regarding land usage compensation. The court claimed NT$767.9 million plus interest. The company disputes the calculation, citing expiration clauses, and has filed an appeal. The case was pending first instance as of August 16, 2007.
- Commitments: Significant non-cancellable commitments include NT$14.5 billion for telecommunications equipment acquisitions and NT$944 million for building acquisitions.
- Financial Instruments: The company holds significant available-for-sale financial assets (NT$17.7 billion) and uses derivatives (forward exchange and index futures) to hedge foreign currency and market risks. Net losses on derivatives for the period were NT$74.4 million.
- Pension Obligations: Following privatization, the company transferred pension obligations to the Privatization Fund. Accrued pension liabilities on the balance sheet increased to NT$2.6 billion.
Key Facts for Investor Verification
- Consolidation of SENAO: Verify the integration progress and financial contribution of SENAO International Co., Ltd., which was acquired in early 2007 and consolidated from April 2007.
- Dividend Payout: Confirm the payment of the declared NT$3.58 per share cash dividend (totaling ~NT$34.8 billion) and the subsequent capital reduction plan.
- Land Dispute: Monitor the status of the litigation with Chunghwa Post Co., Ltd. regarding the NT$767.9 million land usage claim.
- Investment Portfolio: Review the performance of the large portfolio of available-for-sale financial assets (mutual funds and stocks) valued at NT$17.7 billion.
- Capital Expenditures: Assess the impact of the NT$14.5 billion commitment for telecommunications equipment on future cash flows and liquidity.