CHT

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, 2005 (Unaudited)
Key Event: The Company completed its privatization plan on August 12, 2005, reducing Ministry of Transportation and Communications (MOTC) ownership to 47.84%. The Company is the dominant telecommunications service provider in Taiwan, offering fixed-line, cellular, and Internet/data services.

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

Note: Financial results are presented below under ROC GAAP (used for dividends) and US GAAP (used for SEC reporting). Amounts in New Taiwan Dollars (NT$) in millions unless otherwise noted.

Material Changes vs. Prior Period

• Revenue: Total revenue remained flat year-over-year (YoY) under US GAAP (NT$138.4 billion vs. NT$138.4 billion). Under ROC GAAP, revenue was NT$136.9 billion.
  • Growth: Mobile revenue increased 3.7% YoY; Internet and Data revenue increased 5.6% YoY.
  • Decline: Fixed-line revenue declined 6.7% YoY due to mobile substitution and migration to broadband. Domestic long-distance revenue declined 7.8%.
• Profitability: Net income decreased 9.3% YoY under US GAAP (NT$35.9 billion vs. NT$39.6 billion). Under ROC GAAP, net income decreased 2.8% YoY.
  • Driver: The decline in US GAAP net income was primarily driven by a one-time non-cash compensation expense of NT$1.7 billion related to the employee stock purchase plan associated with privatization.
• Balance Sheet: Total liabilities decreased significantly under US GAAP (from NT$119.7 billion to NT$59.9 billion) due to the privatization settlement where the government assumed certain pension liabilities (NT$12.4 billion) and the reclassification of deferred pension costs.
• Cash Flow: Operating cash flow remained robust at NT$56.3 billion (US GAAP), slightly down from NT$57.4 billion in the prior year. Investing cash outflows increased to NT$22.8 billion (US GAAP) due to higher capital expenditures.

Guidance, Outlook, and Risks

• Outlook: Management expects benefits from the implementation of Mobile Number Portability (MNP), effective October 15, 2005, anticipating subscriber gains. 3G services were launched in July 2005 with approximately 265,000 subscribers as of September 30.
• Dividends: Dividend payouts are based on ROC GAAP financials. The Company paid cash dividends of NT$45.3 billion (NT$4.70 per share) for the 2004 fiscal year in the current period.
• Risks & Contingencies:
  • Regulatory: As a former state-owned enterprise, the Company remains subject to extensive regulation by the ROC government and the Ministry of Transportation and Communications.
  • Competition: Intense competition in the telecom industry, particularly in fixed-line and long-distance services.
  • Legal: An ongoing dispute with Chunghwa Post Co., Ltd. regarding land usage compensation (approx. NT$768 million) is currently in pretrial proceedings.
  • Impairment: Recognized an impairment loss of NT$343 million on paging division network facilities due to technological obsolescence.

Investor Verification Checklist

• Accounting Standards: Verify the distinction between ROC GAAP (used for dividends and local reporting) and US GAAP (used for SEC filings). The US GAAP net income is lower due to the non-cash employee stock compensation expense.
• Privatization Impact: Confirm the treatment of pension liabilities transferred to the government upon privatization and the resulting impact on the balance sheet.
• Segment Performance: Review the divergence between declining fixed-line revenues and growing mobile/Internet revenues to assess the company's transition strategy.
• Capital Allocation: Note the significant cash outflow for dividends (NT$45.3 billion) alongside continued high capital expenditures (NT$15.9 billion) for network upgrades.
• Legal Exposure: Monitor the status of the land usage compensation lawsuit with Chunghwa Post Co., Ltd.