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Chunghwa Telecom: Can FTTH Investments Drive Growth?

Zacks Equity Research

On April 14, 2016, we issued an updated research report on Chunghwa Telecom Co. Ltd. CHT, the largest telecom service provider in Taiwan.

Chunghwa Telecom declared strong financial results for the fourth quarter of 2015. Quarterly revenues came in at approximately $1,904 million, up 0.8% year over year. Fourth-quarter net income climbed 7.4% to around $290 million. Net earnings recorded 2.8% growth to 37 cents per ADR.

We note that Chunghwa dominates the telecom market in Taiwan. It holds 80% of the broadband market share, along with 96% of the local fixed-line and 77% of the long-distance fixed-line markets. The company also commands nearly 35% of the Taiwanese wireless market. For full-year 2016, Chunghwa expects total revenue to inch up 0.7% year over year to NT$233.49 billion. The company also intends to raise its market share in the 4G market in Taiwan to 40%. Additionally, Chunghwa is gradually expanding its subscriber base on the back of high-speed next-generation FTTx (fiber to the home/building) offerings. For this purpose, the company has been investing heavily to build a formidable FTTx network in the country.

Chunghwa is also building large-scale fiber-to-the-home (FTTH) and fiber-to-the-building (FTTB) access infrastructure and currently provides both these facilities to 75% of Taiwan’s population. The company witnessed significant subscriber growth for its mobile Internet services on rising demand for 3G mobile broadband and smartphones in Taiwan.

However, Chunghwa unveiled a disappointing outlook for certain important metrics for full-year 2016. Operating costs are expected to rise 2.3% to NT$185.53. Income from operations has been projected at NT$47.75 billion, down 5.2% year over year. Moreover, non-operating income is estimated to be NT$1.09 billion, reflecting a 32.3% plunge from 2015. Further, income before income tax and net income are anticipated to be NT$48.84 billion (down 6.1%) and NT$39.98 billion (down 6.6%), respectively. Meanwhile, earnings per share are likely to be NT$5.15 whereas EBITDA is forecasted at NT$ 82.24 billion, down 1.9%.

Also, the Taiwanese telecom market is oversaturated and has become extremely competitive following telecom regulatory changes. As a result, Chunghwa operates in an already tough environment, which is further burdened by competitive pressure from two other major service providers – Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. Besides that, the market size is small in comparison to other regional country markets, with approximately 23 million potential customers. In addition, Chunghwa’s plans to aggressively deploy 4GLTE network across its footprint and participate in the upcoming 2600 MHz spectrum auction will continue to put strain on the company’s cash position, going ahead.

Chunghwa Telecom currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector include BlackBerry Limited BBRY, Apigee Corporation APIC and Adobe Systems Incorporated ADBE. BlackBerry sports a Zacks Rank #1 (Strong Buy), while both Apigee and Adobe Systems carry a Zacks Rank #2 (Buy).

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