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We reiterate our long-term Neutral recommendation on Chunghwa Telecom Co. Ltd. (CHT - Analyst Report) as we believe the stock is currently fairly valued. The companyposted strong financial results for the fourth quarter of 2012, easily beating the Zacks Consensus Estimates.

Why Kept at Neutral?

Chunghwa is the dominant telecom operator in Taiwan. It holds 80% of the broadband market share, along with 96% of local fixed-line and 77% of long-distance fixed-line market share. The company also commands 34% of the Taiwanese wireless market share. Management has set a yearly revenue target of approximately $7.6 billion by 2015, an improvement of 16% from 2010 levels.

However, the Taiwanese telecom market is oversaturated and has become extremely competitive following telecom regulatory changes. Chunghwa competes in a tough environment with two other major service providers, Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. We expect fierce competition going forward.

Balanced View on Chunghwa

Chunghwa is gradually expanding its subscribers’ base for high-speed next-generation FTTx (fiber to the home/building/curb) offerings. Chunghwa is investing heavily to build a formidable FTTx network in Taiwan. At the end of 2012, the broadband subscriber base was 4.556 million. Chunghwa expects broadband subscribers signing up for 50Mbps connections to reach 1.5 million in 2013.

Chunghwa has witnessed significant subscriber growth for its mobile Internet services due to rising demand for 3G mobile broadband and smartphones in Taiwan. Mobile Internet subscriber base was 2.48 million at 2012 end. The company now expects its Mobile Internet subscriber base to reach 3.5 million by the end of 2013.

On the other hand, approximately 59% of Chunghwa’s customers use 3G services. However, around 71% of Taiwan Mobile’s subscribers and 63% of Far EasTone subscribers use 3G services. If wireless and Internet/data segments fail to retain new business, Chunghwa’s overall top line may be severely affected. Management has provided a weak financial outlook for full year 2013.

Other Stocks to Consider

Chunghwa Telecom currently has a Zacks Rank #4 (Sell). Other telecom stocks worth a look include France Telecom , Telefonica S.A. (TEF - Analyst Report) and Tata Communications Ltd. . All these stocks currently carry a Zacks Rank #2 (Buy). 

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