Chunghwa’s Profit Soars in 1H

Chunghwa Telecom Co. Ltd. (CHT) declared solid financial results for the first half of 2010 with net income soaring 12.7% year over year. This was primarily due to massive reduction in income tax rate from 25% in the year-ago period to just 17%. We maintain our long-term Neutral recommendation for Chunghwa Telecom.

In the first half 2010, GAAP net income was approximately $867 million or 88 cents per ADR compared with a net income of $757 million or 63 cents per ADR in the year-ago period. Total revenue, in the first half of 2010 was approximately $3,119 million, up 7.7% year over year. This encouraging performance was the combined result of higher handset sales and increased revenue from both mobile value-added services (VAS) and Internet services.

Gross margin in the first half 2010 was 44.5% compared with 44.2% in the year-ago period. Operating income, in the first half 2010 increased 2.6% year over year to $936 million and that of the operating margin was 30% compared with 29.9% in the year-ago period. Net profit margin, in the first half 2010 was 25.6% compared with 23.3% in the year-ago period.

During the first half 2010, Chunghwa generated around $1,035 million cash from operation compared with $1,076 million in the year-ago period. Free cash flow (cash flow from operations less capital expenditures), in the first half 2010 was around $742.2 million compared to $752.6 million in the prior-year period.

At the end of the first half 2010, Chunghwa had approximately $3,542 million of cash & marketable securities and around $113 million of outstanding debt on its balance sheet compared to $3,475 million of cash & cash equivalents and $16.5 million of outstanding debt at the end of the prior-year period.

Segment-wise Revenue

Mobile Communications segment accounted for $1,392 million of total first half 2010 revenue, up 4.2% year over year. Internet segment accounted for $374 million, up 4.5% year over year. Domestic Fixed-line Communications segment generated $1,084 million, down 2% year over year. International Fixed-line Communications segment accounted for $242 million, up 3.4% year over year. Non-telecom Business segment generated the rest $27 million, up 36% year over year.

Broadband access (including ADSL and FTTX) revenue was around $317.4 million in the reported period, up 1.5% year over year. In the same period, mobile-VAS revenue was $163.4 million, up 27.4% year over year.

Subscriber Statistics as of June 30, 2010

Total Broadband subscriber base was 4.3 million. Out of this, FTTx subscriber base was 1.85 million, accounted for 42.8% of total broadband subscriber base. Total number of ADSL and FTTx customers with a service speed greater than 8 Mbps was 2.2 million, representing 50.9% of total broadband subscribers compared to 48.8% at the end the prior-year period. HiNet subscriber base was 4.07 million. MOD subscriber base was over 0.72 million.

Mobile subscriber base was 9.4 million, up 4.5% year over year. Out of this 3G wireless subscriber base was 5.1 million, accounted for 53.9% of total mobile subscriber base. International /Domestic fixed-line subscriber base was 12.4 million.

Management Outlook for Third Quarter 2010

Net revenue is expected to be approximately $1,451 million. Gross profit is estimated as $693 million. Operating income is estimated as $436 million. Net income is expected to be around $370 million. Net income per ADR is estimated as 38 cents.

CHUNGHWA TELECM (CHT): Free Stock Analysis Report

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