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, IoT and media services. The Form 20-F is an audited annual report for the fiscal year ended December 31, 2019, prepared under IFRS as issued by the IASB. The filing does not provide separate fourth-quarter 2019 financial statements; the requested “2019 Q4” period is therefore covered through full-year 2019 results.
The company had 7.757 billion common shares outstanding. The ROC government, through the Ministry of Transportation and Communications, owned approximately 35.29% at year-end.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | NT$207.5 billion | NT$215.5 billion | Down 3.7% |
| Gross profit | NT$71.6 billion | NT$75.9 billion | Down 5.8% |
| Income from operations | NT$40.7 billion | NT$43.6 billion | Down 6.9% |
| Operating margin | 19.6% | 20.3% | Down 0.7 percentage points |
| Net income attributable to parent | NT$32.9 billion | NT$37.6 billion | Down 12.3% |
| Net margin attributable to parent | 15.9% | 17.4% | Down 1.5 percentage points |
| Basic EPS | NT$4.25 | NT$4.84 | Down 12.2% |
| Net cash from operating activities | NT$72.4 billion | NT$66.4 billion | Up 9.1% |
| Capital expenditures | NT$24.2 billion | NT$28.6 billion | Down 15.4% |
Gross margin was 34%, compared with 35% in 2018. Depreciation and amortization increased to NT$36.3 billion from NT$33.8 billion, reflecting network and right-of-use asset costs. The effective tax rate rose to 19.0% from 14.2%, primarily because of the 2018 reversal of unappropriated earnings tax and the different tax accrual in 2019.
Revenue mix and operating trends
| Business | 2019 revenue | Year-over-year change | Primary driver |
|---|---|---|---|
| Domestic fixed communications | NT$65.7 billion | Down 1.5% | Declines in voice and broadband partly offset by ICT and MOD growth |
| Mobile communications | NT$95.5 billion | Down 5.4% | Intense price competition and lower mobile-service revenue |
| Internet | NT$30.1 billion | Up 0.9% | Growth in HiLink, intelligent transportation, smart home and Big Data services |
| International fixed communications | NT$11.5 billion | Down 14.5% | Reduction of low-margin international wholesale traffic |
| Other businesses | NT$4.7 billion | Up 2.2% | Growth at semiconductor-testing subsidiary CHPT |
- Mobile service revenue fell 8.1% to NT$58.7 billion; mobile ARPU declined to NT$461 per month from NT$506 in 2018.
- Mobile customers totaled approximately 10.6 million, representing about 36.5% of Taiwan’s mobile customers.
- Fixed-line voice traffic continued to decline; local-call minutes fell 14.5% to 6.2 billion.
- MOD revenue increased 10.6% to NT$3.6 billion, supported by IPTV and subscription video-on-demand growth.
- Internet revenue increased slightly, while HiNet subscribers declined to approximately 4.0 million as customers migrated to mobile broadband and competing cable services.
Liquidity, debt and capital resources
- Cash and cash equivalents increased to NT$34.1 billion at December 31, 2019 from NT$27.6 billion.
- Working capital was NT$27.9 billion, compared with NT$28.5 billion in 2018.
- Total liabilities were NT$92.9 billion and total equity was NT$384.3 billion.
- Debt remained low: short-term loans were NT$0.1 billion and long-term loans were NT$1.6 billion. The filing indicates a strong low-debt capital structure.
- Unused bank facilities totaled approximately NT$47.4 billion, comprising NT$46.1 billion of unsecured and NT$1.3 billion of secured facilities.
- Financing cash outflows were NT$38.9 billion, including NT$34.7 billion of dividends and NT$3.7 billion of lease-liability principal payments.
- 2019 dividends proposed were NT$4.226 per share, or approximately NT$32.8 billion, representing a 99.98% payout ratio under Taiwan IFRSs. Approval by shareholders was pending at the filing date.
Material changes versus the prior comparable period
- Revenue, operating income, net income, EPS and margins all declined, primarily because of mobile price competition, voice substitution, regulatory tariff reductions and lower international wholesale traffic.
- Operating costs declined 2.6% and operating expenses declined 5.0%, but the savings did not fully offset the revenue decline.
- Operating cash flow improved despite lower earnings, mainly due to project-business cash collections and lower pension-fund contributions.
- Capital expenditures decreased, although the company planned higher 2020 spending of approximately NT$30.7 billion for 4G/5G, FTTx, cloud, IoT, data centers and service platforms.
- The company adopted IFRS 16 leases in 2019, recognizing NT$11.4 billion of right-of-use assets and NT$9.8 billion of lease liabilities at year-end. Comparative periods were not restated.
- The company invested NT$4.2 billion in equity-method investments during 2019, including a 41.9% interest in Next Commercial Bank’s preparatory office.
Guidance, outlook, commentary and risks
Outlook and management priorities
- Management is pursuing a customer-centric transformation focused on core telecommunications, emerging ICT businesses, cost optimization and core competencies.
- 5G services were expected to launch in the third quarter of 2020. The company acquired 5G spectrum in February 2020 for approximately NT$48.4 billion and expected to incur related amortization and network-construction costs.
- Planned 2020 capital expenditures were approximately NT$30.7 billion, primarily for fixed-network expansion and 4G/5G deployment.
- The company expects continued growth in cloud, cybersecurity, IDC, AI, Big Data, IoT and digital services, but its historical guidance has not always been achieved: management stated that 2018 and 2019 revenue, operating income, net income and EPS were below published guidance.
- The filing states that working capital is sufficient for current requirements and that future investment and debt needs are expected to be funded mainly through operating cash flow and bank facilities.
Principal risks and contingencies
- Intense mobile, broadband, cable-TV and OTT competition may pressure pricing, customer growth, ARPU and margins.
- As a designated dominant fixed-line provider, the company is subject to tariff controls, interconnection regulation and possible mandatory price reductions.
- The Telecommunications Management Act, effective July 1, 2020, lowers market-entry barriers and may increase competition; the company may also face additional obligations as a dominant provider.
- 5G spectrum, deployment and technology investments may require substantial capital and may not achieve expected commercial returns. COVID-19 could delay equipment supply and reduce handset and mobile-service demand.
- Network outages, earthquakes, typhoons and other disasters could disrupt service. The company does not carry comprehensive property or business-interruption insurance for these risks.
- Cybersecurity breaches, data loss and noncompliance with Taiwan’s cybersecurity and personal-information laws could result in service disruption, penalties, litigation and reputational damage.
- The company had NT$17.9 billion of telecommunications-equipment commitments, NT$44 million of land and building commitments, and approximately NT$11.6 billion of disclosed loan and lease contractual obligations.
- The company committed to provide financial support to Next Commercial Bank if its ownership remains above 25% and the bank encounters financial difficulty or fails capital-adequacy requirements.
- Legal and regulatory proceedings occur in the ordinary course. The company reported no proceedings expected to have a significant effect, but outcomes cannot be assured.
- Deloitte & Touche issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2019.
Most important facts for investors to verify
- Verify that the requested period is annual fiscal 2019 rather than a standalone fourth quarter, because the filing does not provide separate Q4 results.
- Reconcile the decline in consolidated revenue and earnings with mobile-service revenue, ARPU, customer trends and segment profitability.
- Assess whether the planned NT$30.7 billion 2020 capital program and NT$48.4 billion 5G spectrum investment can generate acceptable returns without weakening the company’s low-debt profile.
- Confirm shareholder approval and final payment details for the proposed NT$4.226 per-share 2019 dividend.
- Review the effects of Taiwan tariff reductions and the Telecommunications Management Act on fixed-line pricing, interconnection revenue and competitive conditions.
- Evaluate the potential financial exposure from the Next Commercial Bank support commitment, acquisition commitments, lease liabilities and equipment purchase commitments.
- Monitor COVID-19 effects on handset supply, customer spending, roaming, network construction and 5G launch timing.
- Review the audited financial statements and notes for IFRS 16 adoption effects, impairment charges, related-party transactions and the basis for consolidating minority-owned subsidiaries such as SENAO and CHPT.