CHT(US:CHT)2021-04-18 16:00Part I Key Information This section presents Chunghwa Telecom's selected financial data and significant risk factors, including regulatory pressures, market competition, and operational disruptions, impacting its business and financial performance Selected Financial Data Chunghwa Telecom's financial performance from 2018 to 2020 shows stable revenues around NT$207.6 billion, with net income reaching NT$34.7 billion and total assets increasing to NT$506.2 billion Consolidated Statements of Comprehensive Income Data (2018-2020) | Indicator | 2018 (NT$ billions) | 2019 (NT$ billions) | 2020 (NT$ billions) | 2020 (US$ billions) | | :--- | :--- | :--- | :--- | :--- | | Revenues | 215.5 | 207.5 | 207.6 | 7.4 | | Gross profit | 75.9 | 71.6 | 70.6 | 2.5 | | Income from operations | 43.6 | 40.7 | 42.4 | 1.5 | | Consolidated net income | 38.6 | 33.9 | 34.7 | 1.2 | | Basic EPS (NT$) | 4.84 | 4.25 | 4.31 | 0.15 | Consolidated Balance Sheets Data (As of Dec 31, 2018-2020) | Indicator | 2018 (NT$ billions) | 2019 (NT$ billions) | 2020 (NT$ billions) | 2020 (US$ billions) | | :--- | :--- | :--- | :--- | :--- | | Total assets | 467.1 | 477.1 | 506.2 | 18.0 | | Total liabilities | 82.5 | 92.8 | 118.9 | 4.2 | | Equity attributable to stockholders | 374.7 | 374.2 | 376.1 | 13.4 | Consolidated Cash Flows and Other Financial Data (2018-2020) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities (NT$ billions) | 66.4 | 72.4 | 74.5 | | Net cash used in investing activities (NT$ billions) | (32.6) | (27.1) | (68.3) | | Capital expenditures (NT$ billions) | 28.6 | 24.2 | 23.5 | | Gross margin | 35% | 34% | 34% | | Operating margin | 20% | 20% | 20% | | Cash dividends declared per share (NT$) | 4.479 | 4.226 | 4.306 | Risk Factors The company faces substantial risks from extensive regulation, intense market competition, operational disruptions, cybersecurity threats, geopolitical tensions, and the significant influence of its largest stockholder, the ROC government - The company is subject to extensive regulation by the National Communications Commission (NCC), which imposes tariff reduction plans that could decrease revenues, with a new round effective from April 1, 2020, to March 31, 20241820 - Intense market competition exists from five mobile network operators offering aggressive promotional programs, such as unlimited low-priced data plans, and cable operators bundling high-speed internet and TV services at discounted prices2930 - Operational disruptions are a key risk, stemming from system failures, network shutdowns, or natural disasters like earthquakes and typhoons, with submarine cables broken four times in 2020 causing service suspensions, and geopolitical conflicts causing delays in new submarine cable construction333436 - The ROC government, through the MOTC, is the largest stockholder with approximately 35.29% ownership, giving it significant control over the company's board, business strategy, and dividend policy55 - The company faces substantial political risks due to the tense relationship between the ROC and the PRC, which could adversely affect financial conditions and operations, and the COVID-19 pandemic has negatively impacted roaming revenue and handset sales6567 - Foreign ownership of the company's common shares is limited by the Telecommunications Management Act (TMA) to 49% for direct holdings and 60% for total direct and indirect holdings, with violations potentially leading to sanctions77 Information on the Company This section details Chunghwa Telecom's history, competitive strengths, and business strategies, focusing on customer-centric transformation, expanding core and emerging services, and improving operational efficiency History, Development, Strengths, and Strategies Chunghwa Telecom, Taiwan's largest integrated telecommunications provider, leverages its full-service offerings and strong network to pursue a customer-centric transformation, expanding into emerging technologies and strategic alliances - Chunghwa Telecom is the largest telecommunications service provider in Taiwan, leading in fixed communications, mobile communications, broadband access, and IPTV services, with NT$207.6 billion in revenues and NT$34.7 billion in net income in 2020939495 - Key competitive strengths include its position as an integrated, full-service provider, a premium brand with a broad customer base, extensive FTTx and mobile network coverage, and strong capital resources for investment in new technologies like 5G9899106 - The company's strategic transformation plan, "Together, We Rise in 2021", focuses on four areas: core business, emerging businesses, cost optimization, and core competencies improvement, guided by customer-centric value creation110 - Growth strategies involve expanding broadband services by encouraging upgrades to higher speeds (300Mbps-1Gbps), enhancing 5G penetration, enriching MOD/OTT content, and growing ICT services like IDC, cloud, and cybersecurity112114116 - The company is expanding its business through strategic alliances with major tech firms like Google Cloud, AWS, and Microsoft, and through investments and acquisitions, such as increasing ownership in IISI for FinTech and investing in the internet-only bank NCB126127130 Business Overview Chunghwa Telecom's operations are segmented into domestic fixed, mobile, internet, and international fixed communications, facing intense competition and operating under a transitioning regulatory framework - The business is divided into four core segments: Domestic Fixed Communications, Mobile Communications, Internet, and International Fixed Communications134 - The company faces competition in all business aspects, including from other fixed-line operators, mobile operators offering low-priced data plans, cable TV MSOs, OTT service providers, and system integration service providers207209210 - The regulatory environment is transitioning from the Telecommunications Act to the Telecommunications Management Act (TMA), passed in 2019, which aims to reduce market entry barriers and loosen restrictions, though the company may still be designated as having a significant market position270 - The company's operations are also subject to the Fair Trade Act (FTA), which prohibits anti-competitive conduct such as cartels, price squeezing, and cross-subsidies, with the Fair Trade Commission (FTC) having authority to investigate and impose fines for violations25283 Principal Lines of Business In 2020, Domestic Fixed Communications and Internet services grew, while Mobile Communications and International Fixed Communications saw revenue declines due to competition and strategic adjustments Domestic Fixed Communications Revenue (2018-2020) | Service | 2018 (NT$ billions) | 2019 (NT$ billions) | 2020 (NT$ billions) | | :--- | :--- | :--- | :--- | | Total Revenue | 66.8 | 65.7 | 69.5 | | Local Telephone | 27.6 | 25.7 | 24.5 | | Broadband Access | 18.3 | 18.0 | 18.1 | | MOD Services | 3.3 | 3.6 | 3.64 | Mobile Communications Revenue (2018-2020) | Service | 2018 (NT$ billions) | 2019 (NT$ billions) | 2020 (NT$ billions) | | :--- | :--- | :--- | :--- | | Mobile Services | 63.9 | 58.7 | 56.7 | | Handset Sales | 35.7 | 35.5 | 32.1 | - Internet business revenue increased, representing 15.5% of total revenues in 2020, up from 13.8% in 2018, driven by services such as IDC, cloud, IoT, and cybersecurity179 - International fixed communications revenue decreased to 4.2% of total revenue in 2020, down from 6.2% in 2018, primarily due to a strategic decision to reduce low-margin wholesale International Long Distance (ILD) traffic185403404 Network Infrastructure The company's network infrastructure features extensive fiber optics, 5G mobile network launched in June 2020, and a robust HiNet internet backbone with significant international connectivity - As of December 31, 2020, the transmission network consisted of approximately 2.7 million fiber kilometers for trunking and 10.7 million for local loop, with 10.3 million FTTx ports offering speeds up to 1 Gbps221223 - In February 2020, the company acquired 5G spectrum with 90MHz bandwidth in the 3.5GHz band and 600MHz in the 28GHz band, launching 5G services on June 30, 2020169236 - The HiNet internet service provider has the largest access network in Taiwan, with a backbone bandwidth of approximately 12,232 Gbps and total international connection bandwidth of 2,212 Gbps as of year-end 2020238240 - The company has invested in 27 submarine cables, 12 of which land in Taiwan, increasing its total aggregate international capacity to 18,718 Gbps in 2020 from 17,256 Gbps in 2019231 Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting stable revenues, strong liquidity from operating cash flow, significant capital expenditures on 5G and FTTx, and key contractual obligations Operating Results In 2020, total revenues remained stable at NT$207.6 billion, with growth in domestic fixed and internet services offsetting declines in mobile and international fixed communications, leading to increased operating and net income Revenues by Business Segment (2018-2020) | Segment | 2018 (NT$ billions) | 2019 (NT$ billions) | 2020 (NT$ billions) | | :--- | :--- | :--- | :--- | | Domestic Fixed Communications | 66.8 | 65.7 | 69.5 | | Mobile Communications | 100.9 | 95.5 | 90.2 | | Internet | 29.8 | 30.1 | 32.1 | | International Fixed Communications | 13.4 | 11.5 | 8.7 | | Others | 4.6 | 4.7 | 7.1 | | Total Revenues | 215.5 | 207.5 | 207.6 | - 2020 vs. 2019: Total revenues were stable, Domestic fixed communications revenue increased 5.7% to NT$69.5 billion, driven by ICT and broadband growth, Mobile communications revenue decreased 5.5% to NT$90.2 billion due to lower handset sales and reduced roaming from COVID-19, Internet revenue grew 6.7% to NT$32.1 billion, and Income from operations increased 4.2% to NT$42.4 billion391392398419 - 2019 vs. 2018: Total revenues decreased 3.7% to NT$207.5 billion, Mobile communications revenue fell 5.4% due to market competition, Domestic fixed communications revenue decreased 1.5% as declines in traditional phone services offset growth in ICT and MOD, International fixed communications revenue dropped 14.5% due to a strategy to reduce low-margin wholesale traffic, and Income from operations decreased 6.9% to NT$40.7 billion425429433449 Liquidity and Capital Resources The company maintains strong liquidity with NT$74.5 billion in operating cash flow in 2020, covering capital expenditures and dividends, despite a significant NT$47.4 billion payment for 5G spectrum Summary of Cash Flows (2018-2020) | Cash Flow Item (NT$ billions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 66.4 | 72.4 | 74.5 | | Net cash used in investing activities | (32.6) | (27.1) | (68.3) | | Net cash used in financing activities | (35.0) | (38.9) | (9.8) | | Cash and cash equivalents at end of year | 27.6 | 34.1 | 30.4 | - The significant increase in net cash used in investing activities in 2020 was primarily due to a payment of NT$47.4 billion for acquiring the 5G mobile broadband spectrum462 Capital Expenditures by Business Segment (2018-2020) | Segment (NT$ billions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Domestic fixed communications | 12.7 | 12.1 | 11.5 | | Mobile communications | 10.7 | 7.8 | 8.8 | | Internet | 2.7 | 1.4 | 1.4 | | Total capital expenditures | 28.6 | 24.2 | 23.5 | - Total capital expenditures are planned to increase to approximately NT$43.1 billion in 2021, with a focus on 4G/5G network deployment, FTTx network expansion, and IDC construction477 Research and Development, Patents and Licenses In 2020, R&D focused on 5G, AI, IoT, and smart city solutions, resulting in 161 patent applications and 177 certified patents, aligning with the company's strategic transformation - R&D efforts in 2020 were aligned with the company's transformation plan, focusing on core business technologies like 5G and high-speed broadband, as well as emerging businesses such as AI, IoT, blockchain, and smart city solutions484485 - In 2020, the company applied for 161 patents and had 177 patents certified (including those from previous years), demonstrating a continued focus on innovation486 Contractual Obligations As of year-end 2020, total contractual obligations were NT$38.4 billion, including NT$20.0 billion in bonds payable and NT$9.7 billion in lease liabilities, plus NT$26.8 billion in non-cancelable commitments Contractual Obligations by Period (as of Dec 31, 2020) | Obligation (NT$ billions) | Total | Less than 1 Year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term loans & bills | 7.1 | 7.1 | - | - | - | | Current portion of long-term loans | 1.6 | 1.6 | - | - | - | | Bonds payable | 20.0 | - | - | 8.8 | 11.2 | | Lease liabilities | 9.7 | 3.4 | 4.2 | 1.7 | 0.4 | | Total | 38.4 | 12.1 | 4.2 | 10.5 | 11.6 | - As of December 31, 2020, the company had remaining non-cancelable contract commitments of NT$26.8 billion for the acquisition of telecommunications-related inventory and equipment491 Directors, Senior Management and Employees This section details the company's leadership, including its 13-member board with five independent directors, aggregate compensation of NT$117.5 million in 2020, and its 32,218 employees as of year-end 2020 - The Board of Directors consists of 13 members, including 5 independent directors, with all non-independent directors being representatives of the Ministry of Transportation and Communications (MOTC)494533 - The aggregate compensation for directors and executive officers was NT$117.5 million (US$4.2 million) in 2020, which includes salaries, pensions, and bonuses528 - The company has an audit committee composed of all five independent directors and a compensation committee composed of three independent directors, in compliance with both ROC and NYSE requirements535541 Employee Headcount (Consolidated) | Category | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Technical | 15,760 | 15,633 | 16,352 | | Operations | 15,096 | 14,513 | 14,031 | | Administrative | 1,755 | 1,746 | 1,835 | | Total | 32,611 | 31,892 | 32,218 | Major Stockholders and Related Party Transactions The ROC government is the largest stockholder with 35.29% ownership, alongside Shin Kong Life Insurance Co., Ltd., and the company engages in significant related party transactions with its subsidiary SENAO Major Stockholders' Ownership | Name | 2019 (%) | 2020 (%) | Feb 2021 (%) | | :--- | :--- | :--- | :--- | | The MOTC | 35.29 | 35.29 | 35.29 | | Shin Kong Life Insurance Co., Ltd | 7.01 | 7.47 | 8.16 | - As of February 28, 2021, approximately 3.0% of total outstanding common shares were held in the form of ADSs562 - The company has a significant business relationship with its subsidiary SENAO, which serves as the exclusive distributor of mobile handsets to Chunghwa's retail outlets, with SENAO receiving NT$5.8 billion from Chunghwa for services and Chunghwa selling NT$3.0 billion worth of handsets to SENAO in 2020566567 Financial Information This section confirms the full consolidated financial statements are under Item 18 and details the company's dividend policy, with a 99.99% payout ratio and NT$4.306 per share declared for 2020 Dividends Declared (2016-2020) | Year Ended Dec 31 | Dividends Per Common Share (NT$) | Total Dividends (NT$ billions) | | :--- | :--- | :--- | | 2016 | 4.9419 | 38.3 | | 2017 | 4.7960 | 37.2 | | 2018 | 4.4790 | 34.7 | | 2019 | 4.2260 | 32.8 | | 2020 | 4.3060 | 33.4 | - The dividend for 2020 was approved by the board in February 2021 and is scheduled for declaration at the stockholders' meeting on May 28, 2021, with a payout ratio of 99.99% in 2020 after adjusting for unappropriated earnings573 The Offer and Listing Chunghwa Telecom's common shares are listed on the Taiwan Stock Exchange (TWSE) and its American Depositary Shares (ADSs) trade on the New York Stock Exchange (NYSE) under the symbol "CHT" - The company's common shares trade on the Taiwan Stock Exchange (TWSE) under the code "2412"577 - The company's American Depositary Shares (ADSs) trade on the New York Stock Exchange (NYSE) under the symbol "CHT", with each ADS representing ten common shares578 Additional Information This section details the company's corporate governance, including dividend policy, preemptive rights, Taiwan's exchange controls, and applicable ROC and U.S. federal income tax considerations for shareholders - The company's dividend policy stipulates that at least 50% of net income, after reserves, must be distributed as dividends, with at least 50% of that distribution being in cash594 - When issuing new shares for cash, employees have preemptive rights to subscribe for 10% to 15% of the new issue, and existing shareholders have pro-rata subscription rights for the remainder599 - Taiwan's exchange control regulations allow foreign investors to remit capital and repatriate profits, dividends, and capital gains, subject to certain procedures and limits, such as resident individuals remitting up to US$5 million per year633643 - For non-ROC resident investors, dividends are subject to a 21% withholding tax, while capital gains from the sale of common shares are no longer subject to capital gains tax as of January 1, 2016, and sales of ADSs are not subject to ROC income tax648651652 - For U.S. holders, distributions are generally treated as dividend income, and dividends on ADSs may be subject to reduced tax rates as they are considered paid by a qualified foreign corporation665667 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including interest rate, foreign currency, and equity price fluctuations, with sensitivity analyses indicating potential impacts on pre-tax profit and comprehensive income from these changes - Interest rate risk is considered immaterial, with a hypothetical 0.25% change in interest rates affecting the 2020 profit before tax by approximately NT$19 million (US$0.7 million)687688 - The company is exposed to foreign currency risk from overseas equipment purchases and international settlements, which is managed through the use of forward exchange contracts689691 - Equity price risk exists due to holdings in other companies, with a hypothetical 5% change in equity prices impacting 2020 pre-tax profit by NT$34 million and other comprehensive income by NT$360 million6921205 Part II Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion affirmed by an unqualified attestation report from Deloitte & Touche - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the annual report705 - Management assessed the internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2020708709 - The independent registered public accounting firm, Deloitte & Touche, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020710713 Corporate Governance As a foreign private issuer, Chunghwa Telecom follows ROC corporate governance practices, which differ from NYSE standards in areas like independent director majority and committee structure, while maintaining audit and compensation committees - The company follows its home country (ROC) corporate governance practices, which are permitted for foreign private issuers, in lieu of certain NYSE standards729730 - A significant difference from NYSE standards is that the board does not have a majority of independent directors; it has 5 independent directors on its 13-member board, which complies with ROC law732 - The company has an audit committee composed entirely of its five independent directors, which replaces the role of supervisors and complies with both ROC Securities and Exchange Act and NYSE rules735737 - Unlike NYSE requirements for U.S. companies, Chunghwa Telecom does not have a separate nominating/corporate governance committee; these functions are performed by the full board of directors738 Part III Financial Statements This section presents the complete audited consolidated financial statements for 2018-2020, prepared under IFRS, including balance sheets, income statements, and cash flows, with an unqualified opinion from Deloitte & Touche Report of Independent Registered Public Accounting Firm Deloitte & Touche issued an unqualified opinion on Chunghwa Telecom's consolidated financial statements and internal control over financial reporting, identifying mobile service revenue recognition as a critical audit matter - The independent auditor, Deloitte & Touche, issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with IFRS757 - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020759 - A Critical Audit Matter was identified related to "Revenue Recognition on Mobile Service" due to the complexity and high automation of the systems used to process a significant volume of low-dollar transactions763765 Consolidated Financial Statements The consolidated financial statements for 2019-2020 show total assets grew to NT$506.2 billion, total liabilities increased to NT$118.9 billion, and 2020 revenue was NT$207.6 billion with NT$74.5 billion in operating cash flow Consolidated Balance Sheet Highlights (As of Dec 31) | Account (NT$ millions) | 2019 | 2020 | | :--- | :--- | :--- | | Total current assets | 94,072 | 81,803 | | Total noncurrent assets | 383,056 | 424,377 | | Total Assets | 477,128 | 506,180 | | Total current liabilities | 66,143 | 73,223 | | Total noncurrent liabilities | 26,713 | 45,684 | | Total Liabilities | 92,856 | 118,907 | | Total Equity | 384,272 | 387,273 | Consolidated Statement of Comprehensive Income Highlights (Year Ended Dec 31) | Account (NT$ millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | 215,483 | 207,520 | 207,609 | | Gross Profit | 75,938 | 71,567 | 70,580 | | Income from Operations | 43,644 | 40,646 | 42,361 | | Net Income | 38,581 | 33,921 | 34,704 | | Net Income Attributable to Parent | 37,557 | 32,947 | 33,419 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | Account (NT$ millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 66,366 | 72,427 | 74,456 | | Net cash used in investing activities | (32,614) | (27,127) | (68,254) | | Net cash used in financing activities | (35,035) | (38,934) | (9,802) |