CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd. (Chunghwa)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Third Quarter and Nine Months Ended September 30, 2003

Business Overview: Chunghwa is the dominant telecommunications service provider in Taiwan, offering fixed-line, cellular, and internet/data services. The company is in the process of privatization, with the Ministry of Transportation and Communications (MOTC) holding approximately 65.99% of shares as of October 2003. The company is listed on the Taiwan Stock Exchange and the New York Stock Exchange (NYSE: CHT).

Key Financial Metrics (US GAAP)

Note: Total Debt calculated as Short-term bank loans (8,500) + Commercial paper (4,999) + Long-term loans (700). Q3 EBITDA derived from press release text.

Material Changes vs. Prior Period

• Revenue Growth: Q3 2003 revenue increased 1.7% quarter-on-quarter to NT$46.5 billion, driven primarily by the Wireless business. Year-to-date revenue increased 1.8% compared to the prior year.
• Profitability: Q3 Net Income increased 1.2% year-over-year to NT$12.3 billion. However, 9-month Net Income decreased 2.8% to NT$36.3 billion.
• Cost Structure: Total operating costs increased 3.4% quarter-on-quarter, attributed to a NT$470 million increase in handset subsidies and NT$287 million in promotional expenses.
• Capital Expenditure: 9-month CapEx declined 33.3% to NT$17.4 billion, reflecting stringent cost control. Full-year CapEx is now expected to be NT$31.5 billion, below the original target of NT$33.0 billion.
• Debt Reduction: The company repaid NT$17 billion of syndicated loans in the first quarter of 2003, significantly reducing long-term debt obligations.

Guidance, Outlook, and Management Commentary

• Wireless Performance: Wireless revenues grew 3.7% quarter-on-quarter. The company maintains a 35% revenue market share and 31% subscriber market share (8.0 million subscribers). Average Revenue Per User (ARPU) increased to NT$723.
• Internet & Data: Revenues remained flat quarter-on-quarter. ADSL revenue declined 4.1% due to a 16% tariff reduction in July; however, management expects subscriber growth to offset this in the next quarter. ADSL subscribers reached 2.3 million, with a year-end target of 2.4 million.
• Fixed Line: Revenues increased 0.3% quarter-on-quarter, with seasonal effects offsetting migration to broadband and mobile.
• Outlook: Management expects full-year capital expenditures to be approximately NT$31.5 billion. The company anticipates ADSL revenue recovery in the fourth quarter.
• Risks: Significant risks include extensive government regulation, intense industry competition, labor union relations, and potential disruptions from natural disasters or political events.

Important Facts for Investor Verification

• Privatization Status: Verify the current ownership percentage of the MOTC (reported as 65.99% in Oct 2003) and the timeline for reducing government ownership below 50%.
• ADS Listing: Confirm the trading status and volume of American Depository Shares (ADS) on the NYSE following the July 2003 listing.
• 3G License: Review the amortization schedule and regulatory requirements for the 3G license (cost NT$10.2 billion), which is subject to impairment testing.
• Pension Liabilities: Assess the impact of the privatization on pension obligations, specifically the distinction between civil service eligible employees (Plan A) and others (Plan B), and the potential transfer of liabilities to the government.
• Related Party Transactions: Monitor transactions with equity investees (e.g., Taiwan International Standard Electronics) and government bodies, which constitute a significant portion of the customer base.