Chunghwa Posts Mixed 1Q

Chunghwa Telecom Co. Ltd. (CHT - Analyst Report) declared mixed financial results for the first quarter of 2012. Quarterly total revenue was approximately $1,840 million, up 5.6% year over year. This improved performance was the combined result of increasing smartphone sales along with continuous growing revenue from mobile value-added services (VAS). First-quarter GAAP net income was approximately $328 million, down by a whopping 19.8% year over year. Net earnings per ADR were 41 cents, down 21% year over year. The reduction was primarily attributable to higher operating costs and expenses.

Quarterly operating income was $376.2 million, down 18.7% year over year. Operating margin was 20.4% compared with 26.6% in the year-ago quarter. First-quarter 2012 EBITDA was $644 million, down 11.8% year over year. Quarterly EBITDA margin came in at 35% compared with 41.9% in the prior-year quarter. During the first quarter of 2012, Chunghwa generated around $435.7 million cash from operations, up 34.9% year over year. Capital expenditure, during the reported quarter, was around $222.1 million, up 52.9% year over year.

At the end of the first quarter of 2012, Chunghwa had approximately $2,322 million of cash & cash equivalents and marginally over $60 million of outstanding debt on its balance sheet compared with $3,501.3 million of cash & cash equivalents and $60 million of outstanding debt at the end of 2011.

Segment wise Revenue

Mobile Communications segment accounted for approximately $850 million of the total first-quarter 2012 revenue, up 12% year over year. Internet segment accounted for $205.8 million, up 1.7% year over year. Domestic Fixed-line Communications segment revenue was $630.8 million, down 1.1% year over year. International Fixed-line Communications segment accounted for $119.5 million, down 4% year over year. Other Business segment generated the remaining $33.2 million, up 81.6% year over year.

In the first quarter, Broadband access (including ADSL and FTTx) revenue was over $156 million, down 9.2% year over year. Mobile VAS revenue was more than $152.7 million, up 29.2% year over year. Internet VAS revenue was slightly above $19.9 million, up 1.6% year over year.

Subscriber Statistics as of March 31, 2012

Total Broadband subscriber base was approximately 4.48 million, out of which FTTx subscriber base was around 2.5 million, accounting for 55.8% of total broadband subscriber base. HiNet subscriber base was 3.7 million, up 3.2% year over year. Mobile subscriber base was 10.1 million, up 3.1% year over year. Mobile Internet subscriber base was 1.8 million, up 20% year over year. Management expects its mobile Internet subscriber base to reach 2.5 million by the end of 2012. International /Domestic Fixed-line subscriber base was 12 million. Multimedia-on-demand (MOD) subscriber base was 1.1 million. MOD ARPU was $4.814, up 15.7% year over year.

2012 Outlook

Chunghwa reaffirms its financial outlook for fiscal 2012, provided in February 2012. Total revenue is estimated around $6,177 million, down 1.9% year over year. Operating costs and expenses will be approximately $4,702 million, up 1.8% year over year. Income from operations is estimated to be approximately $1,475 million, down 11.9% year over year. Net income will be around $1,282 million, down 16.8% year over year. EBITDA will be approximately $2,521 million, down 7.3% year over year. EBITDA margin will be 40.8% compared with 43.2% in fiscal 2011.

Recommendation

Chunghwa faces fierce competition from Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. The company 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.