Chunghwa Telecom Co. Ltd. (CHT) declared impressive financial results for the third quarter of 2010 ,with net income soaring 9.5% year over year. This was primarily due to a massive reduction in income tax rate from 25% in the year-ago quarter to just 17%. Chunghwa is now more confident regarding the fourth quarter of 2010 and has projected quarterly total revenue of $1,498 million.

Quarterly GAAP net income was approximately $384 million, up 9.5% year over year.  Net earnings per ADR were 40 cents, also up 9.55% year over year. Total revenue in the reported quarter was approximately $1,629 million, up 1.6% year over year. This encouraging performance was the combined result of higher broadband access revenue and continuously growing revenue from both mobile value-added services (VAS) and Internet services.

Quarterly operating income was $460.8 million, up 1.8% year over year. Operating margin was 28.4% compared to 28.3% in the year-ago quarter. Third quarter EBITDA was $732.8 million, down 1.2% year over year. EBITDA margin was 45% compared to 46.3% in the prior-year quarter.

During the first nine months of 2010, Chunghwa generated around $1,677.7 million cash from operations, up 6% year over year. Free cash flow (cash flow from operations less capital expenditures), in the same period was around $1181.8 million, up 12.2% year over year.  

At the end of the quarter, Chunghwa had approximately $2,307 million of cash & marketable securities and around $112.7 million of outstanding debt on its balance sheet compared to $2,341.2 million of cash & marketable securities and $33.5 million of outstanding debt at the end of the prior-year period.

Segment Revenue

Mobile Communications segment accounted for $713.6 million of total revenues in the reported quarter, up 1% year over year. Internet segment accounted for $204.8 million, up 10.2% year over year. Domestic Fixed-line Communications segment generated $560 million, down 1.1% year over year. International Fixed-line Communications segment accounted for $128 million, down 1.9% year over year. Non-telecom Business segment generated the rest $22.4 million, up 10% year over year.

Broadband access (including ADSL and FTTX) revenue was around $163.2 million in the reported quarter, up 3% year over year. In the same quarter, mobile-VAS revenue was $89.6 million, up 32.3% year over year.

Subscriber Statistics as of September 30, 2010

Total Broadband subscriber base was 4.3 million. Out of this, FTTx subscriber base was 1.96 million, accounted for 45.1% of total broadband subscriber base. The number of ADSL and FTTx customers with a service speed greater than 8 Mbps was 2.3 million, representing 52.8% of total broadband subscribers compared to 50.9% at the end the previous quarter. HiNet subscriber base was 4.1 million. MOD subscriber base was over 0.75 million.

Mobile subscriber base was 9.6 million, up 4.3% year over year. Out of this, 3G wireless subscriber base was 5.3 million, accounting for 54.9% of total mobile subscriber base. International /Domestic Fixed-line subscriber base was 12.3 million.

Recommendation

We maintain our long-term Neutral recommendation for Chunghwa Telecom. Currently it is a short-term Zacks #3 Rank (Hold) stock.

 
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