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Chunghwa Telecom Co. Ltd. (CHT - Analyst Report) declared solid financial results for the third quarter of 2011. Quarterly total revenue was approximately $1,900 million, up 9.5% year over year.

This improved performance was the combined result of increasing smartphone sales with continuously growing revenue from both mobile and Internet value-added services (VAS). In the previous quarter, smartphones constituted 45% of total handsets sold by Chunghwa.

Third-quarter GAAP net income was approximately $406.8 million, down 0.2% year over year.  However, net earnings per ADR were 51 cents, up 5% year over year. The increase was primarily attributable to the higher net income and the capital reduction in January 2011, which reduced the total number of outstanding shares by 20%.

Quarterly operating income was $473.3 million, down 3.9% year over year. Operating margin was 24.9% compared with 28.4% in the year-ago quarter. Third-quarter 2011 EBITDA was $746.8 million, down 4.1% year over year. Quarterly EBITDA margin came in at 39.4% compared with 45% in the prior-year quarter.

During the third quarter of 2011, Chunghwa generated around $641.2 million cash from operations, down 14.1% year over year. Capital expenditure during the reported quarter was around $227.1 million, up 7.9% year over year.  

At the end of the third quarter of 2011, Chunghwa had approximately $2,312.5 million of cash & cash equivalents and around $72.2 million of outstanding debt on its balance sheet compared with $3,000 million of cash & cash equivalents and $112.7 million of outstanding debt at the end of fiscal 2010.

Segment-wise Revenue

Mobile Communications segment accounted for $810.2 million of the total third-quarter 2011 revenue, up 6.6% year over year. Internet segment accounted for $219.6 million, up 0.6% year over year.

Domestic Fixed-line Communications segment generated $699.7 million, up 17.1% year over year. International Fixed-line Communications segment accounted for $128.9 million, down 6% year over year. Other Business segment generated the remaining $41.3 million, up 36% year over year.

In the third quarter, Broadband access (including ADSL and FTTx) revenue was $170.8 million, down 2.1% year over year. Mobile VAS revenue was $133.7 million, up 40.5% year over year. Internet VAS revenue was $20.8 million, up 13.3% year over year.

Subscriber Statistics as of September 30, 2011

Total Broadband subscriber base was approximately 4.48 million. Out of this, FTTx subscriber base was around 2.32 million, accounting for 51.8% of total broadband subscriber base. HiNet subscriber base was 3.67 million, up 3% year over year.

Mobile subscriber base was 9.96 million, up 4% year over year. Out of this, 3G subscribers base was more than 5.83 million. Mobile Internet subscriber base was 1.32 million, up 102% year over year. Management is expecting its mobile Internet subscriber base to reach 1.47 million by the end of 2011.

International /Domestic Fixed-line subscriber base was 12.25 million. Multimedia-on-demand (MOD) subscriber base was more than 980,000. Management is expecting its MOD subscriber base to reach 1 million by the end of November 2011.

Recommendation

Chunghwa operates in a competitive environment with Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. The company is trying hard to enter into the Chinese telecom market. It entered into agreements with China Telecom Corp. Ltd. (CHA - Snapshot Report) and China Unicom Ltd. (CHU - Analyst Report) to access software from their application stores for providing premium services to its subscribers.

We maintain our long-term Neutral recommendation on Chunghwa. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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