We downgrade our recommendation for Chunghwa Telecom Co. Ltd. (CHT), the largest integrated telecom service provider in Taiwan, to Underperform, ahead of the fourth quarter of 2010 financial results. The reason for the change in recommendation is the current high-level of valuation of the company.
Chunghwa is currently trading at the high-end of its 52-week price range. The stock price has moved up by more than 64% in the last one year. At present, Chunghwa is trading at significantly high multiples compared with the S&P 500 average and the industry average with respect to several valuation metrics. We believe at this stage, Chunghwa is overvalued and the stock price should approach the S&P 500 average.
Chunghwa is the market leader in Taiwan for traditional voice and dial-up services, VoIP, IPTV, broadband, and mobile segments. Aggressive roll-out of fiber-to-the- home and 3G mobile technology places the company ahead of the competition. However, the Taiwanese telecom market is quickly approaching maturity and has become extremely competitive following telecom regulatory changes.
Chunghwa competes in a tough environment with the two major telecom service providers, Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. The market size is comparably smaller than other regional country markets, with approximately 23 million potential customers. We expect fierce competition going forward as the Chinese giant China Mobile Ltd. (CHL) has purchased a 12% stake in Far EasTone Telecommunications.
Chunghwa is rapidly losing revenue in its Fixed-line Services (both domestic and international) segment. If Wireless and Internet/Data segments are unsuccessful in retaining new business, Chunghwa’s overall top line may be severely affected. In addition, the company must successfully expand to the overseas markets in order to continue consistent sequential growth.