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Chunghwa Underperforms in 3Q

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Chunghwa Telecom Co. Ltd. (CHT - Free Report) declared weak financial results for the third quarter of 2012. Quarterly total revenue was approximately $1,822.4 million, showing a 2.3% drop year over year. Third-quarter GAAP net income was approximately $341.7 million, down by 14.6% year over year.  Net earnings per ADR were 45 cents, down 10% year over year.

Quarterly operating income was $405.4 million, down 12.8% year over year. Operating margin was 22.2% compared with 24.9% in the year-ago quarter. Third-quarter 2012 EBITDA was $679 million, down 7.6% year over year. Quarterly EBITDA margin came in at 37.3% compared with 39.4% in the prior-year quarter. During the third quarter of 2012, Chunghwa generated around $528.3 million cash from operations, down 17.2% year over year. Capital expenditure during the reported quarter, was around $279 million, up 25% year over year.

At the end of the third quarter of 2012, Chunghwa had approximately $1,300.6 million of cash & cash equivalents and a little over $56 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

The Mobile Communications segment accounted for approximately $833.5 million of the total third-quarter 2012 revenue, up 4.7% year over year. The Internet segment accounted for $202.7 million, down 6.1% year over year. The Domestic Fixed-line Communications segment generated $634.5 million in revenue, down 7.7% year over year. International Fixed-line Communications segment generated $129.3 million, up 2.2% year over year. Other Business segment generated the remaining $22.4 million, down by a whopping 44.3% year over year.

In the third quarter, Broadband access (including ADSL and FTTx) revenue was around $161.5 million, down 3.7% year over year. Mobile VAS revenue was nearly $179.2 million, up 36.5% year over year. Internet VAS revenue was around $21.8 million, up 5.4% year over year. Handset sales revenue was $214.1 million, up 14% year over year.

Subscriber Statistics as of September 30, 2012

Total Broadband subscriber base was more than 4.564 million, out of which FTTx subscriber base was around 2.67 million, accounting for 58.5% of total broadband subscriber base. Broadband subscribers signing up for 50M connections were over 818,000. HiNet subscriber base was 3.77 million, up 2.6% year over year. Mobile subscriber base was 10.21 million, up 2.5% year over year. Mobile Internet subscriber base was 2.22 million, up by a significant 68.5% year over year. Management expects its mobile Internet subscriber base to reach 2.45 million by the end of 2012. International /Domestic Fixed-line subscriber base was 11.85 million. Multimedia-on-demand (MOD) subscriber base was more than 1.17 million.

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.


Chunghwa faces stiff competition from Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. The company entered into agreements with China Telecom Corp. Ltd. (CHA - Free Report) and China Unicom Ltd. (CHU - Free 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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