Business Context and Reporting Period
Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2007 (1H 2007) and Three months ended June 30, 2007 (2Q 2007).
Filing Date: August 30, 2007
Business Overview: Chunghwa is the leading telecommunications service provider in Taiwan, offering fixed-line, mobile, and Internet/data services. The company completed its privatization in 2005, with the Ministry of Transportation and Communications (MOTC) holding 35.41% of shares as of June 30, 2007. The company recently consolidated SENAO International Co., Ltd. (acquired in April 2007) and CHIEF Telecom Co., Ltd. (acquired in September 2006).
Key Financial Metrics
| Metric (NT$ Millions) | 6 Months Ended June 30, 2007 | 6 Months Ended June 30, 2006 | 3 Months Ended June 30, 2007 | 3 Months Ended June 30, 2006 |
|---|---|---|---|---|
| Total Revenue | 96,429 | 91,404 | 50,648 | 46,384 |
| Operating Income | 30,511 | 26,969 | 15,343 | 14,368 |
| Net Income | 26,401 | 19,775 | 15,279 | 10,456 |
| EBITDA (Calculated) | 50,275 | 47,359 | 25,201 | 24,489 |
| Net Cash from Operations | 32,697 | 46,050 | N/A | N/A |
| Cash and Equivalents (End of Period) | 82,370 | 63,206 | 82,370 | 63,206 |
| Total Debt (Short + Long Term) | 840 | 449 | 840 | 449 |
| EPS (Basic) | 2.48 | 1.85 | 1.44 | 0.98 |
Note: EBITDA calculated as Net Income + Income Tax + Interest Expense + Depreciation & Amortization. Debt figures exclude non-interest bearing liabilities like customer deposits.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 5.5% year-over-year (YoY) for 1H 2007. This was driven by a 7.8% increase in Internet and data revenue and a 1.5% increase in mobile revenue. Fixed-line revenue declined 2.9% due to substitution by mobile and broadband services.
- Profit Surge: Net income rose 33.5% YoY to NT$26.4 billion. The primary drivers were a 35.2% decrease in income tax expense (due to the reversal of a provision for undistributed earnings from 2006) and reduced personnel expenses following the completion of the Early Retirement Program (ERP).
- Cost Management: Total operating costs increased 2.3% YoY, largely due to the consolidation of SENAO (NT$3.6 billion in costs). However, this was offset by a 10.5% decrease in personnel expenses and a 23.9% reduction in handset subsidies.
- Cash Flow: Net cash provided by operating activities decreased 29% to NT$32.7 billion, primarily due to higher income tax payments and performance-based employee bonuses.
- Balance Sheet: Total assets increased to NT$416.5 billion. Cash and cash equivalents grew to NT$82.4 billion. Total liabilities increased to NT$102.2 billion, partly due to a dividend payable of NT$34.8 billion declared in June 2007.
Guidance, Outlook, and Risks
- Capital Expenditures: Capex for 1H 2007 was NT$9.7 billion. The company expects total capital expenditures for the full year 2007 to be approximately NT$30 billion.
- Personnel Costs: Following the completion of the ERP (4,574 employees participated), the company expects personnel expenses to decline further to NT$32.6 billion by the end of 2007.
- Operational Outlook:
- Mobile: 3G subscribers grew 31.1% to 1.68 million. 3G ARPU is 58% higher than 2G.
- Internet: Broadband subscribers increased 7.7% YoY to 4.17 million. High-speed (>8 Mbps) subscriptions now represent 24.9% of the base.
- Fixed-Line: Subscribers remain at 13.04 million, though revenue is under pressure from substitution.
- Risks and Contingencies:
- Regulatory: Operations are subject to ROC government regulations; revocation of licenses would severely impact operations.
- Litigation: A dispute with Taiwan Post Co., Ltd. regarding land usage compensation (claim of NT$768 million) is pending. Management does not believe the outcome will be material.
- Competition: Intense competition in the telecom industry and potential disruptions from natural disasters or political conditions.
Investor Verification Checklist
- Tax Provision Reversal: Verify the sustainability of the 33.5% net income growth, which was significantly aided by a one-time reversal of the income tax provision on undistributed earnings.
- ERP Impact: Confirm the long-term trajectory of personnel cost savings now that the Early Retirement Program is complete, versus the impact of new performance-based bonus programs.
- Fixed-Line Decline: Monitor the rate of fixed-line revenue erosion due to mobile and VoIP substitution and the effectiveness of international long-distance growth in offsetting this.
- SENAO Integration: Assess the financial performance and integration progress of the newly consolidated SENAO subsidiary, which contributed NT$3.2 billion in revenue in 2Q 2007.
- Dividend Payout: Note the significant dividend payable (NT$34.8 billion) declared in June 2007 and its impact on future cash flows.