CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2005 (Audited)
Filing Date: March 30, 2006
Accounting Standards: Financial statements presented under both ROC GAAP and US GAAP. Significant differences exist due to the treatment of employee stock subscription costs related to privatization.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Service revenues increased slightly by 0.4% under ROC GAAP and decreased 0.3% under US GAAP compared to 2004. Fixed-line revenue declined 8.0% due to mobile substitution and competition, while Internet and data services grew 7.2% and mobile services grew 3.9%.
• Profitability Decline: Net income decreased 4.4% under ROC GAAP and 34.6% under US GAAP. The significant drop in US GAAP net income is primarily due to a one-time non-cash charge of NT$12.8 billion related to employee stock subscription costs recognized during privatization.
• Balance Sheet Adjustments: Total liabilities decreased significantly from NT$108.0 billion in 2004 to NT$52.0 billion in 2005 (ROC GAAP). This reduction is largely attributed to the reclassification of accrued pension liabilities and dividends payable following the privatization process completed in August 2005.
• Impairment Charges: The company recognized an impairment loss of NT$343 million on telecommunications network facilities (paging division) and a realized loss of NT$740 million on long-term investments (Taipei Financial Center).

Outlook, Risks, and Unusual Items

• Unusual Items: The primary unusual item is the NT$12.8 billion compensation expense under US GAAP for employee stock subscriptions. This charge does not affect cash flow or ROC GAAP financials, which are used for dividend calculations.
• Privatization Impact: The company completed privatization on August 12, 2005, reducing government ownership to below 50%. This resulted in significant accounting adjustments regarding pension obligations and capital surplus.
• Subsequent Events: In February 2006, the board approved a share buyback program to acquire 250 million treasury shares (2.59% of outstanding shares) at prices between NT$40 and NT$70. As of March 17, 2006, 120.7 million shares had been purchased.
• Risks: Key risks include intense competition in the telecom industry, regulatory changes, mobile substitution of fixed-line services, and potential disruptions from natural disasters or political conditions.
• Segment Performance:
  • Mobile: 8.16 million subscribers; 3G service launched with 296,000 subscribers by year-end.
  • Internet: 4.1 million subscribers; ADSL subscribers grew 19.0% YoY to 3.65 million.
  • Fixed-Line: 13.3 million subscribers; revenue declined due to migration to broadband and mobile.

Investor Verification Checklist

• GAAP Reconciliation: Verify the specific impact of the NT$12.8 billion employee stock compensation charge on US GAAP earnings versus ROC GAAP earnings, as this significantly alters profitability metrics.
• Pension Obligations: Confirm the status of the transfer of pension plan assets to the Privatization Fund and the final settlement of accrued pension liabilities post-privatization.
• Share Buyback Execution: Monitor the progress of the approved share buyback program (target 250 million shares) and its impact on earnings per share and capital structure.
• Fixed-Line Decline: Assess the sustainability of the 8.0% decline in fixed-line revenue and the company's ability to offset this with growth in mobile and data segments.
• Impairment Details: Review the specific valuation assumptions used for the impairment of the paging division assets and the investment in Taipei Financial Center.