(CHT) Balanced View on Chunghwa Telecom

We reaffirm our Neutral recommendation on Chunghwa Telecom Co. Ltd. (CHT) as we believe Chunghwa’s mobile and Internet/Data operations will drive overall growth in the years to come. However, a highly competitive Taiwanese telecom market remains the major concern for the company.

Aggressive roll-out of fiber-to-the-home and 3G mobile services have placed the company ahead of its competitors. The company has also expanded into IPTV and cloud-computing services.

Chunghwa holds 80% of broadband market share, 96% of local fixed-line and 77% of long-distance fixed-line market share in Taiwan. The company also commands 34% of the Taiwanese wireless market share.

A recent ruling of the Taiwanese government has changed the pricing right of a landline-to-mobile call in favor of the fixed-line operator from mobile operator. This shift in government policy boosted Chunghwa’s revenue. Management sets a yearly revenue target of approximately $7.6 billion by 2015, which will be an improvement of 16% from 2010.

Chunghwa is trying hard to enter into the Chinese telecom market. The company is also eyeing the lucrative $33.3 billion Chinese cloud-computing market. It has agreements with China Telecom Corp. Ltd. (CHA) and China Unicom Ltd. (CHU) to access software from their application stores to provide value added services to subscribers.

Chunghwa is gradually expanding its subscriber base for high-speed next-generation FTTx (fiber to the home/building/curb) offerings. The company is investing heavily to build a formidable FTTx (fiber-to-the-home/premises) network in Taiwan. At the end of the third quarter of 2012, FTTx subscriber base stood at 2.67 million, which accounted for 58.5% of total broadband subscriber base.

Nevertheless, Taiwanese telecom market is over-saturated with 115% wireless penetration and has become extremely competitive following the telecom regulatory changes. Chunghwa competes in a tough environment with two other major service providers – Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. Going forward, the company expects to face severe challenges from China Mobile Ltd. (CHL) and Far EasTone Telecommunications, as they are cooperating for the 4G LTE-TDD network technology.

Chunghwa Telecom’s 3G customer base is much less as compared to Taiwan Mobile’s 71% and Far EasTone’s 63%. If the company’s wireless segments fail to bring and retain new customers, Chunghwa’s overall top line may be severely affected. Moreover, management has provided a weak financial guidance, lowering the revenue and income expectations for full year 2012.

Chunghwa Telecom retains a Zacks #3 Rank, implying a short-term Hold rating.
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