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Chwnghwa Telecom Remains Neutral

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We maintain our Neutral recommendation on Chunghwa Telecom Co. Ltd. based on its mixed financial results for the first quarter of 2013. Chunghwa is the largest integrated telecommunications service provider in Taiwan offering a full suite of telecom services through fixed-line, mobile and data networks throughout Taiwan and to offshore islands. 

Why Kept at Neutral?

Chunghwa is investing heavily in building a formidable FTTx (fiber-to-the-home/premise) network in Taiwan. At the end of first quarter, the total broadband subscriber base was 4.559 million. Of this, the FTTx subscriber base was 2.79 million or 61.2% of the total. HiNet subscriber base was 3.78 million. Broadband subscribers using 50 Mbps connections were over 964,000. Chunghwa expects to cover 1.5 million broadband subscribers using 50 Mbps connections by the end of this year.

Chunghwa has witnessed significant subscriber growth for its mobile Internet services on growing demand for 3G mobile broadband and smartphones in Taiwan. Mobile subscriber base at the end of the first quarter was 10.35 million, up 2.6% year over year. Mobile VAS revenues were $219.4 million, up 42.2% year over year. The Mobile Internet subscriber base was 2.87 million. The company expects its Mobile Internet subscriber base to reach 3.5 million by the end of 2013.

However, Chunghwa had to reduce its mobile voice tariff following a cut in the mobile interconnection rate by the National Communications Commission, the telecom regulatory body of Taiwan, effective Jan 5, 2013. Additionally, the company reduced tariffs for broadband services, IP peering and domestic leased line wholesale services in April. These cuts could take a toll on Chunghwa’s revenues over the next 4 years.

Moreover, the Taiwanese telecom market is oversaturated and turned extremely competitive following telecom regulatory changes. Chunghwa competes with two other major service providers, Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd.

Other Stocks to Consider

Chunghwa currently has a Zacks Rank #4 (Sell). However, there are other telecom stocks in the Asian Telecom Operator segment that are performing well. These include Nippon Telegraph & Telephone Corp. , Shenandoah Telecommunications Co. (SHEN - Free Report) and China Mobile Ltd. (CHL - Free Report) . While both Nippon and Shenandoah currently carry a Zacks Rank #1 (Strong Buy), China Mobile has a Zacks Rank #2 (Buy).  

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