CHUNGHWA TELECOM CO LTD annual report, Q4 FY2021

Business Context and Reporting Period

Chunghwa Telecom Co., Ltd. is Taiwan’s largest integrated telecommunications provider, offering fixed-line, mobile, internet, international communications, ICT, cloud, cybersecurity, data-center and related services. This Form 20-F is an annual report for the fiscal year ended December 31, 2021, prepared under IFRS as issued by the IASB. The filing does not provide a separate standalone fourth-quarter financial statement; the available information is primarily full-year 2021 with comparisons to 2020 and 2019.

ADSs trade on the NYSE under “CHT,” with each ADS representing 10 common shares. The company had 7.757 billion common shares outstanding and the ROC government, through the MOTC and other government-controlled entities, held approximately 42.56% as of February 28, 2022.

Key Financial Metrics

NT$ billions, except EPS and margins	2021	2020	Change
Revenue	210.5	207.6	+1.4%
Operating income	44.9	42.4	+6.1%
Operating margin	21.3%	20.4%	+0.9 percentage points
Income before tax	46.1	42.8	+7.6%
Consolidated net income	37.0	34.7	+6.7%
Net income attributable to parent	35.6	33.4	+6.6%
Net margin	17.5%	16.7%	+0.8 percentage points
Basic EPS	NT$4.59	NT$4.31	+6.5%
Operating cash flow	74.9	74.5	+0.5%
Capital expenditures	35.3	23.5	+50.3%

Revenue growth was led by mobile communications, internet services and international ICT and cloud services. Mobile communications revenue increased 5.6% to NT$95.2 billion, including mobile service revenue growth of 2.3% to NT$58.0 billion, primarily from 5G migration and 4G upselling. Internet revenue rose 3.0% to NT$33.1 billion. Domestic fixed communications revenue declined 6.7% to NT$64.8 billion, mainly because of lower ICT project revenue and continued declines in traditional voice services.

Operating costs and expenses decreased 1.0% to NT$165.2 billion. Lower personnel costs and completion of certain large ICT projects more than offset higher handset costs, 5G depreciation and amortization. Personnel expenses were NT$44.7 billion, or 27.1% of operating costs and expenses.

Liquidity, Debt and Capital Resources

Cash and cash equivalents increased to NT$39.8 billion from NT$30.4 billion at year-end 2020.
Net cash used in investing activities was NT$31.2 billion, compared with NT$68.3 billion in 2020, which included a one-time NT$47.4 billion payment for 5G spectrum.
Net cash used in financing activities was NT$34.3 billion, including NT$33.4 billion of cash dividends paid.
Unsecured bonds payable totaled NT$27.0 billion at year-end, with stated interest rates of 0.42% to 0.59%.
Long-term secured loans totaled NT$1.6 billion, and short-term loans totaled NT$65 million.
Unused facilities for unsecured bank loans and commercial paper were approximately NT$61.7 billion; unused secured bank-loan facilities were not available at year-end.
Total liabilities were NT$123.7 billion and total equity was NT$389.1 billion, implying a relatively low reported debt burden compared with equity.

Material Changes Versus the Prior Comparable Period

Mobile communications revenue recovered from the 2020 decline as 5G adoption increased; however, mobile segment income before tax fell 27.5% to NT$6.3 billion because of higher handset costs, 5G depreciation and concession amortization.
Domestic fixed communications segment income before tax increased 16.2% to NT$26.1 billion despite lower revenue, reflecting lower ICT project costs, lower personnel expense and elimination of franchise fees after TMA registration.
Internet segment income before tax increased 10.6% to NT$14.5 billion.
International fixed communications segment income before tax increased 40.5% to NT$1.2 billion, supported by ICT and cloud services.
Mobile customer churn improved to 9.43% from 11.60%, while average mobile minutes per user declined to 72 from 82.
Broadband access revenue increased to NT$18.6 billion; broadband ARPU rose to NT$745 per month and FTTx ARPU to NT$812. Traditional local telephone customers declined 2.5% to approximately 9.65 million.
Capital expenditures rose sharply to NT$35.3 billion, with NT$16.8 billion directed to mobile communications, principally 5G deployment.

Guidance, Outlook, Commentary and Unusual Items

Management expected 2022 capital expenditures of approximately NT$36.8 billion, including 5G deployment, IDC construction, FTTx expansion, submarine cables, PSTN migration, cloud, IoT, service platforms, ESG and asset activation. Funding is expected to come primarily from operating cash flow and bank loans.
The company began a customer-centric organizational transformation in January 2022, with potential benefits from improved operating efficiency but execution, employee-relations and unexpected-cost risks.
The board proposed a 2021 cash dividend of NT$4.608 per share, or approximately NT$35.7 billion, representing a 99.98% payout ratio after adjustments. The proposal was subject to shareholder approval scheduled for May 27, 2022.
In January 2022, the board authorized up to NT$10.0 billion of additional unsecured domestic bonds. In March 2022, the company issued NT$3.5 billion of sustainability bonds.
The company recorded a NT$420 million impairment loss on certain satellite-related right-of-use assets, a NT$29 million goodwill impairment at SENAO and a NT$83 million reversal of prior investment-property impairment.
Remaining non-cancellable commitments included NT$0.6 billion for land and buildings and NT$21.6 billion for telecommunications inventory and equipment. The planned acquisition of the 900MHz spectrum and equipment from Asia Pacific Telecom was estimated at NT$1.6 billion to NT$2.1 billion.
Chunghwa committed to provide financial support to Next Commercial Bank if its ownership remains above 25% and the bank experiences financial difficulty or fails applicable capital-adequacy requirements. NCB reported a 2021 net loss of NT$446 million.
Key risks include regulatory tariff reductions, intense mobile and broadband competition, 5G and ICT investment returns, cybersecurity and privacy incidents, natural disasters, submarine-cable disruptions, COVID-19 and supply-chain disruption, Taiwan geopolitical tensions, labor relations and government influence.
The SJC2 submarine cable’s target service commencement was delayed to the third quarter of 2023. The company does not maintain comprehensive property or business-interruption insurance for natural disasters.

Most Important Facts to Verify

Reconcile the requested “2021 Q4” analysis to the annual filing, because the filing does not clearly present standalone fourth-quarter results.
Review whether the proposed NT$4.608 per-share dividend was ultimately approved and paid, and assess its sustainability against planned 2022 capital spending.
Track mobile segment profitability as 5G revenue growth is weighed against spectrum amortization, network depreciation, handset costs and competitive pricing.
Verify the timing, final price and regulatory approval of the 900MHz spectrum and equipment acquisition.
Assess the cash-flow impact of NT$36.8 billion of planned 2022 capital expenditures and approximately NT$22.2 billion of disclosed land, building and equipment commitments.
Monitor NCB’s losses, capital adequacy and Chunghwa’s potential support obligation.
Evaluate regulatory developments under the Telecommunications Management Act, including possible designation as a significant market-position enterprise and future tariff changes.
Review cybersecurity, natural-disaster, submarine-cable and geopolitical exposures, including the company’s limited insurance coverage.
Confirm the effect of the January 2022 organizational transformation on costs, productivity, labor relations and operating results.
Note that Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2021.