We upgrade our recommendation on Chunghwa Telecom Co. Ltd. (CHT) to Neutral following its strong fourth-quarter 2010 financial results. Chunghwa Telecom is the largest integrated telecommunications service provider of Taiwan. The company offers a full suite of telecom services through fixed-line, mobile, and data networks throughout Taiwan and in offshore islands. Although fixed-line offerings have become relatively saturated, we expect Chunghwa’s mobile and Internet/Data operations to drive overall growth over the next several years.
Aggressive roll-out of fiber-to-the- home and 3G mobile technology has placed the company ahead of the competition. Mobile subscriber base at the end of 2010 was 9.68 million, up 4.4% year over year. Out of this, 3G wireless subscriber base was 5.43 million, comprising an impressive 56.1% of total mobile subscriber base. Chunghwa is selling 3G iPhone of Apple Inc. (AAPL) in Taiwan. In addition, the company has introduced its own brand based on Google Inc’s (GOOG) Android smart-phone, which targets the entry-level segment. In 2010,mobile-VAS revenue was $364.6 million, up 30.8% year over year. Chunghwa is now more confident of fiscal 2011 and expected yearly total revenue to rise by approximately 1.94%.
Chunghwa is conducting live trial runs of Long Term Evolution (LTE) networks using Nokia Siemens Network solutions. The aim is to develop a super-fast next-generation mobile broadband network that will act as a natural upgrade for the company’s existing WCDMA networks. Chunghwa decided to implement LTE in 2011 in Taiwan.
Nevertheless, Chunghwa is currently trading at the high-end of its 52-week price range. The stock price has moved up by more than 64% in the last one year. At present, Chunghwa is trading at significantly high multiples compared with the S&P 500 average and the industry average with respect to several valuation metrics. We believe at this stage, Chunghwa is fairly valued and does not provide any above market potential.
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