We reaffirm our Neutral recommendation on
Chunghwa Telecom Co. Ltd.
) 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
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
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.
China Unicom Ltd.
) 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
Nevertheless, Taiwanese telecom market is oversaturated 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
) 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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