Business Context and Reporting Period
Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Accounting Basis: U.S. GAAP (Note: Company plans to switch to R.O.C. GAAP with U.S. GAAP reconciliation starting in 2008)
Overview: Chunghwa Telecom is Taiwan's largest integrated telecommunications service provider, offering fixed-line, cellular, and Internet/data services. The company was privatized in August 2005, reducing government ownership to below 50%. As of March 31, 2008, the Republic of China government (via the Ministry of Transportation and Communications) held approximately 35.65% of outstanding shares.
Key Financial Metrics (2007)
| Metric | 2007 (NT$ Billions) | 2007 (US$ Billions) | 2006 (NT$ Billions) |
|---|---|---|---|
| Total Revenues | 200.9 | 6.2 | 186.3 |
| Operating Income | 62.8 | 1.9 | 56.3 |
| Net Income | 49.5 | 1.5 | 42.1 |
| Operating Margin | 31.3% | - | 30.2% |
| Net Margin | 24.6% | - | 22.6% |
| Operating Cash Flow | 87.2 | 2.7 | 100.1 |
| Cash and Equivalents | 76.2 | 2.4 | 70.7 |
| Total Debt | 0.1 | 0.0 | 0.4 |
| Capital Expenditures | 25.1 | 0.8 | 27.7 |
Note: US$ amounts translated at NT$32.43 = US$1.00 (Dec 31, 2007 rate).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.8% to NT$200.9 billion, driven by growth in Internet/data services and the consolidation of Senao International Co., Ltd. (a cellular phone distributor) in April 2007.
- Segment Performance:
- Fixed Line: Revenues declined slightly (0.6%) to NT$62.6 billion due to traffic migration to cellular and broadband services.
- Cellular: Revenues grew 1.0% to NT$73.7 billion, supported by increased customer base and traffic volume.
- Internet & Data: Revenues increased 6.3% to NT$49.2 billion, fueled by growth in ADSL and FTTx broadband subscribers.
- Other: Revenues surged 278.3% to NT$15.4 billion, primarily due to the inclusion of Senao's cellular phone sales revenues.
- Profitability: Net income rose 17.3% to NT$49.5 billion. Operating margin improved to 31.3% despite higher costs of revenue associated with Senao's consolidation.
- Cost Structure: Operating costs increased 6.2% to NT$138.1 billion. Cost of revenues rose 13.7% largely due to Senao's cost of goods sold, partially offset by reduced personnel expenses from early retirement programs.
- Derivative Losses: The company recognized a significant unrealized valuation loss of NT$580 million on a foreign currency derivative contract with Goldman Sachs entered in September 2007.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy
- Capital Expenditures: Planned CAPEX for 2008 is approximately NT$32.6 billion, focusing on next-generation network migration (IP-based), 3G expansion, and FTTx infrastructure.
- Dividends: The company historically distributes approximately 90% of net income as dividends. Dividends for 2007 were expected to be declared at the June 2008 shareholders' meeting.
- WiMAX: The company failed to obtain a WiMAX license in the first round (July 2007) and plans to bid in the second round expected in mid-2009.
Key Risks
- Regulatory Environment: As a dominant provider, the company is subject to strict tariff controls and price reduction mandates by the National Communications Commission (NCC). Future tariff reductions are expected.
- Competition: Intensifying competition in fixed-line, cellular, and broadband markets, including from new entrants and alternative technologies (VoIP, WiMAX).
- Foreign Currency Derivative: A 10-year contract with Goldman Sachs requires cash payments if the NT dollar appreciates below NT$31.50/USD. As of March 31, 2008, the unrealized loss was NT$3.08 billion, with potential future cash outflows estimated at NT$1.00 billion if rates remain unchanged.
- Political Risk: Tensions between the Republic of China and the People's Republic of China could impact market stability and investor confidence.
- Accounting Change: Beginning in 2008, financial reporting will shift to R.O.C. GAAP with U.S. GAAP reconciliation, which may alter reported figures.
Investor Verification Checklist
- Derivative Exposure: Verify the current status and potential cash flow impact of the Goldman Sachs foreign currency derivative contract given recent NT dollar appreciation trends.
- Regulatory Tariff Adjustments: Monitor NCC announcements regarding mandated price reductions for fixed-line and cellular services in 2008.
- WiMAX Licensing: Track the timeline and outcome of the second round of WiMAX license auctions scheduled for mid-2009.
- Accounting Transition: Review the 2008 interim reports to understand the impact of switching from U.S. GAAP to R.O.C. GAAP on reported earnings and equity.
- Senao Integration: Assess the long-term profitability contribution of the Senao acquisition to the "Other" revenue segment.
- Government Ownership: Monitor the Republic of China government's shareholding percentage and any potential future divestitures.