We downgrade our recommendation for Chunghwa Telecom Co. Ltd. (CHT) to Neutral following increased competition in the Taiwanese telecom market and a challenging economic environment. Chunghwa commands the majority share in the Taiwan market for traditional voice and dial-up services, VoIP, IPTV, broadband, and mobile segments. However, the Taiwanese telecom market is quickly approaching maturity and has become extremely competitive following telecom regulatory changes.
 
Chunghwa competes in a tough environment with Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd., the two other major service providers. The market size is smaller than other regional markets, with approximately 23 million potential customers. We expect fierce competition going forward as the Chinese giant China Mobile Ltd. (CHL) has purchased a 12% stake in Far EasTone Telecommunications.
 
Chunghwa is rapidly losing revenue in its Fixed-line Services (both domestic and international) segment. The company has reduced its subscriber estimation for MOD (multimedia-on-demand) offerings. From an initial estimate of 1.2 million subscribers by the end of 2010, the company now expects its subscriber base to reach just 1 million. Severe global economic recession that has hit Taiwan hard has forced this downward revision.
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