CHT(CHT) - 2021 Q4 - Annual Report

Part I Key Information This section outlines significant risks associated with the company's business, industry regulations, and securities ownership Risk Factors The company faces substantial risks from telecommunications regulation, intense market competition, operational disruptions, and geopolitical factors - The company is subject to extensive regulation by the NCC under the Telecommunications Management Act (TMA), which limits flexibility, and as a dominant provider, faces mandatory tariff reductions that could adversely affect revenues[9][10] - Intense competition from mobile and cable operators using aggressive pricing and bundled services could impact the company's market share and revenue[18][19] - Operational disruptions are a key risk, with the SJC2 submarine cable construction delayed by over two years due to geopolitical conflicts, potentially impacting international bandwidth supply[23][24][26] - The ROC government is the largest stockholder with approximately 35.29% ownership, giving it significant control over the board, business strategy, and dividend policy[44] - Foreign ownership is capped at 49% for direct holdings and 60% for total holdings, and violating these limits could result in fines or loss of network approval[69][70] - The COVID-19 pandemic impacted roaming revenue, handset supply chains, and project timelines, potentially harming revenues from mobile and emerging services[56][58] Information on the Company This section provides an overview of the company's history, business operations, competitive strengths, and strategic direction History and Development of the Company The company is Taiwan's largest integrated telecommunications provider, leveraging its brand and technology to maintain market leadership - Chunghwa Telecom is Taiwan's largest integrated telecommunications service provider, offering domestic fixed, mobile, internet, and international fixed communications services[84][85] FY2021 Key Financials | Metric | Amount (NT$ billion) | Amount (US$ billion) | | :--- | :--- | :--- | | Revenues | 210.5 | 7.6 | | Consolidated Net Income | 37.0 | 1.3 | | Capital Expenditures | 35.3 | 1.3 | - Key competitive strengths include its position as an integrated full-service provider, a premium brand with a broad customer base, extensive network coverage, and strong capital resources[89][90][98] - The business strategy focuses on a customer-centric transformation, expansion into new growth areas like ICT and IoT, and forming strategic alliances[102][103][118][119] Business Overview The company's operations are segmented by communications type, with the mobile segment being the largest revenue contributor Revenue by Business Segment (2019-2021) | Business Segment | 2019 Revenue (NT$ B) | 2020 Revenue (NT$ B) | 2021 Revenue (NT$ B) | | :--- | :--- | :--- | :--- | | Domestic Fixed Communications | 65.7 | 69.5 | 64.8 | | Mobile Communications | 95.5 | 90.2 | 95.2 | | Internet | 30.1 | 32.1 | 33.1 | | International Fixed Communications | 11.5 | 8.7 | 9.1 | | Others | 4.7 | 7.1 | 8.3 | - Domestic fixed communications revenue decreased to NT$64.8 billion in 2021, driven by declines in traditional voice services, though partially offset by growth in broadband and MOD services[128] - Mobile communications revenue increased to NT$95.2 billion in 2021, supported by 5G migration and handset sales, with the company remaining Taiwan's largest mobile operator[157][159] - Internet business revenue grew to NT$33.1 billion in 2021, fueled by demand for broadband upgrades, IDC, cloud, and cybersecurity services[172][174] - The company faces robust competition from four other mobile operators and multiple cable TV providers based on price, service quality, and network reliability[199][200][208] Organizational Structure The company's organizational structure is detailed in a diagram, with a list of subsidiaries provided in Exhibit 8.1 - A diagram of the company's organizational structure as of March 31, 2022 is provided, with a detailed list of subsidiaries available in Exhibit 8.1[299] Property, Plant and Equipment The company's assets primarily consist of telecommunications equipment, land, and buildings used for operations and investment - The company's main property, plant, and equipment are telecommunications equipment, land, and buildings in Taiwan, mostly for operational use[239] - In 2021, the company generated approximately NT$863.7 million (US$31.1 million) in rental income from its properties[241] - The company is developing new properties to enhance asset value and support human resources[241] Operating and Financial Review and Prospects This section analyzes the company's financial performance, key revenue drivers, capital expenditures, and critical accounting estimates Operating Results In 2021, total revenues and operating income increased, driven by growth in mobile communications and internet services Consolidated Financial Highlights (in NT$ billions) | Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | 207.5 | 207.6 | 210.5 | | Income from Operations | 40.7 | 42.4 | 44.9 | | Consolidated Net Income | 33.9 | 34.7 | 37.0 | | Net Income (Parent) | 32.9 | 33.4 | 35.6 | - In 2021, revenue growth was primarily driven by a 5.6% increase in mobile communications revenue and a 3.0% increase in internet services revenue[334][337] - Domestic fixed communications revenue decreased by 6.7% in 2021 to NT$64.8 billion, mainly due to lower ICT project revenue and declines in traditional voice services[327] - Operating costs and expenses decreased by 1.0% in 2021 to NT$165.2 billion, primarily due to the completion of large ICT projects and lower personnel costs[345] - In 2020, revenues remained stable as growth in domestic fixed and internet services was offset by a 5.5% decline in mobile communications revenue due to competition and COVID-19 impacts[360][361][366][368] Liquidity and Capital Resources The company's liquidity is primarily sourced from strong operating cash flow, which funds capital expenditures and dividends Summary of Cash Flows (in NT$ billions) | Cash Flow | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 72.4 | 74.5 | 74.9 | | Net cash used in investing activities | (27.1) | (68.3) | (31.2) | | Net cash used in financing activities | (38.9) | (9.8) | (34.3) | | Cash and cash equivalents at end of year | 34.1 | 30.4 | 39.8 | Capital Expenditures by Business (in NT$ billions) | Business Segment | 2019 | 2020 | 2021 | 2022 (Planned) | | :--- | :--- | :--- | :--- | :--- | | Mobile communications | 7.8 | 8.8 | 16.8 | 14.5 | | Domestic fixed communications | 12.1 | 11.5 | 13.3 | * | | Internet | 1.4 | 1.4 | 2.9 | * | | International fixed communications | 1.1 | 0.8 | 0.5 | * | | Others | 1.8 | 1.0 | 1.8 | 22.3 (incl. others) | | Total | 24.2 | 23.5 | 35.3 | 36.8 | - As of December 31, 2021, the company had NT$39.8 billion in cash and cash equivalents and unused credit lines of NT$61.7 billion[398] - The company has commitments of NT$21.6 billion for telecommunications equipment and NT$0.6 billion for land and buildings as of year-end 2021[394] Research and Development, Patents and Licenses The company's R&D focuses on next-generation networks and emerging technologies, resulting in 161 patent filings in 2021 - Key R&D achievements in 2021 include advancements in 5G Standalone (SA) networks, 5G edge computing, multi-cloud management, and AIoT applications[415] - The company is developing innovative applications in smart transportation, digital convergence, AI, and cybersecurity[416] - In 2021, the company filed for 161 patents and was granted 167 patents, reflecting its R&D output[416] Critical Accounting Estimates This section details key accounting judgments, including revenue recognition, impairment of assets, and pension benefit calculations - Revenue recognition requires significant judgment, especially in allocating transaction prices for bundled offerings and determining principal versus agent roles[421][425][429] - The company assesses impairment of trade receivables using an expected credit loss (ECL) model, which relies on assumptions about default risk and loss rates[451][452] - Estimating the useful lives and assessing impairment of long-lived assets involves subjective judgments about technology, market conditions, and future cash flows[456][457] - In 2021, the company recognized an impairment loss of NT$420 million on certain right-of-use assets and a NT$29 million impairment loss on goodwill[464][467] - Pension benefit calculations rely on actuarial assumptions such as discount rates, employee turnover, and future salary increases[469] Directors, Senior Management and Employees This section provides information on the company's leadership, compensation, board structure, and workforce Directors and Senior Management The company is led by an experienced board and executive team, with non-independent directors representing the MOTC - The Board of Directors consists of 13 members, including 5 independent directors, with all non-independent directors representing the MOTC[478][516] - Chi-Mau Sheih serves as the Chairman and Chief Executive Officer, and Shui-Yi Kuo serves as the President[479][480] Compensation Aggregate compensation for directors and executives was NT$106.5 million in 2021, overseen by the compensation committee Aggregate Compensation (2019-2021) | Year | Aggregate Compensation (NT$) | | :--- | :--- | | 2019 | 115,079,161 | | 2020 | 117,485,681 | | 2021 | 106,456,778 | - The 2021 aggregate compensation of NT$106.5 million includes NT$63.2 million in salary and NT$43.3 million in bonuses[509] - Bonuses for non-independent directors, amounting to NT$35.8 million in 2021, were paid directly to the MOTC as these directors are its legal representatives[510] Board Practices The board includes five independent directors and operates with Audit, Corporate Strategy, and Compensation committees - The company has a 13-member board of directors, including five independent directors, with terms lasting until June 20, 2022[516] - An Audit Committee, composed of all five independent directors, was established to replace supervisors, with Lo-Yu Yen designated as the financial expert[518][523] - A Compensation Committee, composed of three independent directors, is responsible for reviewing compensation policies for directors and managers[525] - A Corporate Strategy Committee, with eight director members, advises on long-term goals and major investments[524] Employees The company had 31,812 employees on a consolidated basis in 2021, with a highly educated workforce and strong union membership Consolidated Employee Headcount (2019-2021) | Category | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Technical | 15,633 | 16,352 | 16,150 | | Operations | 14,513 | 14,031 | 13,852 | | Administrative | 1,746 | 1,835 | 1,810 | | Total | 31,892 | 32,218 | 31,812 | - As of December 31, 2021, 85.8% of employees at the parent company held bachelor, master, or doctoral degrees[530] - Approximately 99% of employees on a non-consolidated basis are members of the principal labor union, and the company maintains good relations with them[531] - Employees are entitled to 1.7% to 4.3% of distributable earnings as compensation, with NT$1.2 billion distributed in Q3 2021[532] Share Ownership Directors and executives hold a negligible percentage of shares, while several subsidiaries have employee stock option plans - As of February 28, 2022, directors and executive officers beneficially owned an aggregate of 381,182 common shares, representing approximately 0.005% of total outstanding shares[533] - The company's consolidated subsidiaries, including CHIEF, CHTSC, and CLPT, have active employee stock option plans[536][537][540] Major Stockholders and Related Party Transactions The MOTC is the largest stockholder, and the company engages in significant arm's-length transactions with its subsidiaries Major Stockholders The Ministry of Transportation and Communications (MOTC) is the largest stockholder with a 35.29% holding Major Stockholders' Ownership Percentage | Stockholder | As of Feb 28, 2022 (%) | | :--- | :--- | | The MOTC | 35.29% | | Shin Kong Life Insurance Co., Ltd | 6.36% | - As of February 28, 2022, 20,602,198 ADSs were held by 30 record holders, representing about 2.7% of total outstanding common shares[543] Related Party Transactions The company engages in significant arm's-length transactions with related parties, primarily its subsidiaries - The company has an exclusive agreement with its subsidiary SENAO for mobile handset distribution, from which SENAO received NT$6.0 billion in 2021[547] - In 2021, Chunghwa paid its subsidiary Honghwa approximately NT$6.3 billion for on-site sales and equipment installation services[549] - The company purchased network equipment and supplies worth approximately NT$1.5 billion from its subsidiary Chunghwa System Integration in 2021[549] - No loans, credit, or guarantees for borrowings have been provided to any directors or executive officers[545] Financial Information This section covers the company's dividend policy and legal proceedings, highlighting a proposed dividend of NT$4.608 per share for 2021 Annual Dividends per Common Share (2017-2021) | Year Ended | Dividend per Share (NT$) | | :--- | :--- | | Dec 31, 2017 | 4.7960 | | Dec 31, 2018 | 4.4790 | | Dec 31, 2019 | 4.2260 | | Dec 31, 2020 | 4.3060 | | Dec 31, 2021 | 4.6080 | - The dividend for 2021, proposed at NT$4.608 per share, is subject to approval and represents a payout ratio of 99.98%[554] - The company is not currently involved in any material litigation or other proceedings that would have a significant effect on its financial position[553] The Offer and Listing The company's common shares are listed on the TWSE and its ADSs are listed on the NYSE - Common shares are listed on the Taiwan Stock Exchange (TWSE) under code "2412"[558] - American Depositary Shares (ADSs) are listed on the New York Stock Exchange (NYSE) under the symbol "CHT", with each ADS representing ten common shares[558] Closing Prices on April 6, 2022 | Security | Exchange | Closing Price | | :--- | :--- | :--- | | Common Shares | TWSE | NT$127 | | ADSs | NYSE | US$44.5 | Additional Information This section covers the articles of incorporation, exchange controls, and tax implications for investors Memorandum and Articles of Incorporation The articles of incorporation specify authorized capital, board structure, dividend policy, and shareholder rights - The company's authorized capital is NT$120 billion, divided into 12 billion common shares[564] - The dividend policy mandates that at least 50% of distributable net income be distributed as dividends, with at least 50% of that in cash[573] - When issuing new shares for cash, 10% to 15% must be reserved for employees, and existing shareholders have preemptive rights for the remainder[578] - Major corporate actions like amending the Articles of Incorporation require approval by at least two-thirds of shares represented at a meeting[583][584] Exchange Controls Taiwan's exchange controls require registration for foreign investors and have annual remittance limits - Foreign exchange transactions must be handled by designated banks, with annual non-trade remittance limits of US$50 million for companies and US$5 million for individuals[623][624] - Foreign investors must register with the TWSE to invest in Taiwan's securities market, and direct investment in telecommunications requires specific approval[611][615] - ADS holders can convert proceeds into foreign currency, but withdrawing underlying shares requires the holder to register as a foreign investor in Taiwan[618][621] Taxation This section outlines ROC and U.S. tax implications for investors, including withholding tax on dividends - ROC Taxation: Dividends distributed to non-resident holders are subject to a 21% withholding tax, while capital gains from share sales are exempt from income tax[629][632] - ROC Taxation: A securities transaction tax of 0.3% is payable by the seller on the sale of common shares in Taiwan, but not on transfers of ADSs[637] - U.S. Federal Income Tax: For U.S. holders, distributions are generally treated as dividend income and may be eligible for reduced "qualified dividend income" tax rates[646][648] - U.S. Federal Income Tax: The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2021 taxable year[656] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate, foreign currency, and equity price risks, which are actively managed - The company's primary market risks are interest rate, foreign currency, and equity price risk[666] - A 0.25% change in interest rates would impact 2021 pre-tax profit by approximately NT$31.3 million[669] - Foreign currency risk is managed through forward exchange contracts to hedge against fluctuations, particularly for Euro-denominated purchases[670][671] - A 5% change in equity prices would impact 2021 pre-tax profit by NT$46 million and other comprehensive income by NT$181 million[674] Description of Securities Other than Equity Securities This section details the fees and charges associated with the company's American Depositary Shares (ADSs) ADS Depositary Service Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$5.00 per 100 ADSs issued | | Cancellation of ADSs | Up to US$5.00 per 100 ADSs cancelled | | Distribution of cash dividends | Up to US$2.00 per 100 ADSs held | | Distribution of stock dividends/rights | Up to US$5.00 per 100 ADSs held | - In 2021, the company received US$0.6 million in net payments from the depositary, JPMorgan Chase Bank, N.A., to cover expenses related to the ADR program[683] Part II Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2021 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the annual report[686] - Management's annual report on internal control over financial reporting concluded that the internal controls were effective as of December 31, 2021[687][690] - The independent auditor, Deloitte & Touche, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[691][694] - There were no material changes in internal control over financial reporting during the year ended December 31, 2021[701] Audit Committee Financial Expert The company has designated Lo-Yu Yen, an independent director, as its audit committee financial expert - Lo-Yu Yen, an independent director, is designated as the audit committee financial expert[702] Code of Ethics The company has adopted a Code of Ethics applicable to all directors, managers, and employees - A Code of Ethics and Ethical Corporate Management Best Practice Principles has been adopted for all directors, managers, and employees[703] Principal Accountant Fees and Services Total fees paid to the principal accountant, Deloitte & Touche, amounted to NT$49.6 million in 2021 Accountant Fees (in NT$ millions) | Fee Category | 2020 | 2021 | | :--- | :--- | :--- | | Audit fees | 43.4 | 49.3 | | Audit-related fees | — | — | | Tax fees | — | — | | All other fees | 0.4 | 0.3 | - All audit and non-audit services provided by the principal accountant were pre-approved by the company's audit committee[708] Corporate Governance The company follows ROC corporate governance practices, which differ in some respects from NYSE standards for domestic issuers - The company follows ROC corporate governance practices, which differ from NYSE standards, particularly regarding director independence and committee structure[710][712] - Unlike NYSE rules, ROC law does not require a majority of independent directors; the company has five independent directors on its thirteen-member board[713] - The company has an Audit Committee and a Compensation Committee composed of independent directors, complying with both ROC and applicable NYSE rules[718][723] - The company does not have a dedicated nominating/corporate governance committee; instead, directors are elected by stockholders[719][720] Part III Financial Statements This section lists the consolidated financial statements and the independent auditor's report included in the annual report - The report includes the consolidated financial statements and the report of the independent registered public accounting firm[732] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Deloitte & Touche issued unqualified opinions on the financial statements and internal controls, identifying mobile service revenue recognition as a critical audit matter - The auditor, Deloitte & Touche, expressed an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019, 2020, and 2021[738] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[739] - A Critical Audit Matter was identified concerning Revenue Recognition on Mobile Service, highlighting the complexity of auditing highly automated systems[741][742][743] Consolidated Financial Statements Tables The financial statements show asset growth to NT$512.9 billion and net income growth to NT$37.0 billion in 2021 Consolidated Balance Sheet Highlights (as of Dec 31) | (In NT$ Millions) | 2020 | 2021 | | :--- | :--- | :--- | | Total Current Assets | 81,803 | 91,021 | | Total Noncurrent Assets | 424,377 | 421,854 | | Total Assets | 506,180 | 512,875 | | Total Current Liabilities | 73,223 | 66,229 | | Total Noncurrent Liabilities | 45,684 | 57,516 | | Total Liabilities | 118,907 | 123,745 | | Total Equity | 387,273 | 389,130 | Consolidated Statement of Comprehensive Income Highlights | (In NT$ Millions) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | 207,520 | 207,609 | 210,478 | | Gross Profit | 71,567 | 70,580 | 75,367 | | Income from Operations | 40,646 | 42,361 | 44,930 | | Net Income | 33,921 | 34,704 | 37,047 | | Total Comprehensive Income | 35,249 | 35,994 | 36,081 | Consolidated Statement of Cash Flows Highlights | (In NT$ Millions) | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 72,427 | 74,456 | 74,858 | | Net cash used in investing activities | (27,127) | (68,254) | (31,172) | | Net cash used in financing activities | (38,934) | (9,802) | (34,314) | | Net increase (decrease) in cash | 6,405 | (3,630) | 9,359 | Notes to Consolidated Financial Statements This section provides detailed explanations of accounting policies, segment information, and specific financial statement items - The financial statements are prepared in conformity with International Financial Reporting Standards (IFRSs) as issued by the IASB[773] - Revenue from bundled contracts is allocated based on relative standalone selling prices, while project business revenue is recognized over time or upon completion[844][847] - The company acquired a controlling interest in International Integrated Systems, Inc. (IISI) on July 1, 2020, which is accounted for as a business combination[940] - In February 2020, the company paid NT$48,373 million to acquire 5G mobile broadband licenses, which are recorded as intangible assets[1005] - The company has both defined contribution and defined benefit retirement plans, with the net defined benefit liability at NT$2,288 million as of year-end 2021[1040][1044]