Business Context and Reporting Period
Chunghwa Telecom Co., Ltd. is Taiwan’s largest integrated telecommunications provider, offering fixed-line, mobile, broadband, internet, international communications, IPTV/MOD, cloud, information security, IoT and other ICT services. This Form 20-F is an annual report for the fiscal year ended December 31, 2018; the filing does not provide a separate fourth-quarter income statement.
The consolidated financial statements are prepared under IFRS as issued by the IASB. U.S. dollar amounts use an exchange rate of NT$30.61 per US$1.00. The company had 7,757,446,545 common shares outstanding at year-end, and each ADS represents 10 common shares.
2018 Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | NT$215.5 billion | NT$227.5 billion | Down 5.3% |
| Gross profit | NT$75.9 billion | NT$80.7 billion | Down 5.9% |
| Income from operations | NT$43.6 billion | NT$46.7 billion | Down 6.5% |
| Income before tax | NT$45.0 billion | NT$48.0 billion | Down 6.3% |
| Net income | NT$38.6 billion | NT$40.2 billion | Down 3.9% |
| Net income attributable to parent | NT$37.6 billion | NT$39.0 billion | Down 3.7% |
| Basic EPS | NT$4.84 | NT$5.03 | Down 3.8% |
| Operating margin | 20.3% | 20.5% | Down 0.2 percentage points |
| Net margin attributable to parent | 17.4% | 17.2% | Up 0.2 percentage points |
Revenue declines were concentrated in mobile and domestic fixed communications. Mobile communications revenue fell 7.7% to NT$100.9 billion, including a 15.7% decline in mobile service revenue to NT$63.9 billion. Domestic fixed communications revenue fell 6.2% to NT$66.8 billion. Internet revenue increased 3.1% to NT$29.8 billion, while international fixed communications revenue declined 0.9% to NT$13.4 billion.
- Mobile service ARPU declined to NT$506 from NT$595, reflecting intense price competition, lower voice usage, free VoIP applications and the adoption of IFRS 15.
- Mobile customers totaled approximately 10.6 million, including 9.5 million 4G customers; market share was approximately 37.7%.
- Fixed-line customers declined 2.5% to approximately 10.4 million. Broadband revenue declined modestly to NT$18.3 billion, while MOD revenue increased 27.7% to NT$3.3 billion.
- HiNet subscribers declined to approximately 4.1 million, but internet revenue grew through IDC, enterprise connectivity, information security and IoT services.
Cash Flow, Capital Expenditures, Debt and Liquidity
- Net cash provided by operating activities was NT$66.4 billion, compared with NT$70.9 billion in 2017.
- Net cash used in investing activities was NT$32.6 billion, compared with NT$36.7 billion in 2017. Capital expenditures were NT$28.6 billion, primarily for fixed communications, mobile networks, internet infrastructure and ICT projects.
- Net cash used in financing activities was NT$35.0 billion, including NT$37.2 billion of dividends paid.
- Cash and cash equivalents were NT$27.6 billion at December 31, 2018. Working capital was NT$28.5 billion.
- Total liabilities were NT$82.5 billion, including NT$0.1 billion of short-term loans and NT$1.6 billion of long-term loans. The company therefore maintained very low reported debt relative to equity.
- Unused bank facilities totaled approximately NT$46.3 billion of unsecured capacity and NT$1.3 billion of secured capacity.
- 2019 planned capital expenditures were approximately NT$29.0 billion, expected to be funded primarily by operating cash flow and bank loans.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income declined because of aggressive mobile pricing, lower voice traffic, fixed-line substitution by mobile and VoIP services, mandatory tariff reductions and lower ICT project revenue.
- Cost of goods sold and ICT costs decreased, while depreciation and amortization increased to NT$33.8 billion from NT$31.9 billion, partly reflecting network and spectrum investments.
- Segment income before tax declined sharply in domestic fixed communications to NT$18.3 billion from NT$24.9 billion, but increased in mobile communications to NT$15.3 billion from NT$12.4 billion and in internet services to NT$12.0 billion from NT$11.1 billion.
- The effective tax rate decreased to 14.2% from 16.3%, primarily because of changes to the tax treatment of unappropriated earnings and the reversal of prior accruals.
- The company adopted IFRS 9 and IFRS 15 in 2018. IFRS 15 changed the timing and classification of bundled handset and service revenue and caused a reported NT$3.6 billion reduction in 2018 net income relative to the company’s prior accounting basis, according to the filing’s reconciliation.
- The board proposed a 2018 cash dividend of NT$4.479 per share, or approximately NT$34.7 billion, subject to shareholder approval. The proposed payout ratio was 97.9% based on Taiwan IFRSs.
Guidance, Outlook, Commentary and Risks
Management expected continued investment in FTTx, 4G capacity, cloud computing, IDC, IoT, information security and digital platforms. The company planned approximately NT$29.0 billion of 2019 capital expenditures and targeted broader higher-speed FTTx coverage. It expected to pursue 5G spectrum, expand ICT and IoT offerings, and develop digital banking opportunities, including a proposed investment of up to NT$4.5 billion in Next Commercial Bank, subject to regulatory approval.
The filing states that 2018 revenue, operating income, net income and EPS were below the company’s previously published guidance, but it does not provide the guidance figures in the supplied text. Management also disclosed that its relationship with labor unions remained good, although the company appealed aggregate labor-law fines of NT$5.4 million related to overtime incidents arising from a major promotion.
- Regulatory risk includes mandatory tariff reductions, dominant-provider obligations, interconnection-rate reductions, foreign ownership limits and potential changes to Taiwan’s telecommunications laws.
- Competition remains intense in mobile data, fixed broadband, cable broadband and OTT video, creating pressure on ARPU, customer growth and promotional spending.
- Future 5G spectrum acquisition could require substantial concession payments and increase operating costs through amortization.
- Network outages, earthquakes, typhoons and cybersecurity incidents could disrupt services. The company does not carry comprehensive property insurance or business-interruption insurance.
- Cybersecurity and personal-information obligations increased under Taiwan’s Cyber Security Management Act, effective January 1, 2019. The company reported no regulatory penalties for information-security or data-leakage events in 2018.
- The ROC government, through the MOTC and other government-controlled entities, remained the largest shareholder and held approximately 42.13% as of March 31, 2019, including approximately 35.29% held through the MOTC.
- Contractual obligations totaled approximately NT$13.6 billion, including NT$10.5 billion of operating leases and NT$1.4 billion related to the ST-2 satellite. Additional commitments included NT$15.8 billion for telecommunications equipment purchases.
Most Important Facts an Investor Should Verify
- Whether mobile price competition and declining voice usage continue to reduce mobile service revenue and ARPU.
- The effect of future NCC tariff and interconnection-rate reductions on fixed broadband, wholesale and mobile economics.
- Actual 2019 capital expenditures versus the planned NT$29.0 billion and the pace of 5G spectrum investment.
- The sustainability of the proposed NT$4.479 per-share dividend and the company’s unusually high payout ratio.
- The financial impact of IFRS 16 lease accounting adopted in 2019, including the expected recognition of approximately NT$12.2 billion of right-of-use assets and NT$10.3 billion of lease liabilities at initial application.
- Regulatory approval, funding and strategic rationale for the proposed investment of up to NT$4.5 billion in Next Commercial Bank.
- Potential effects of cybersecurity incidents, natural disasters, litigation, labor disputes and the company’s limited insurance coverage.
- Whether the company retains control over minority-owned consolidated subsidiaries, particularly Senao, CHIEF and CHPT.