Fitch Revises Chunghwa Telecom's Outlook to Negative

Debt ratings agency, Fitch Ratings has affirmed Taiwan's Chunghwa Telecom's (CHT) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA', and revised the Outlook to Negative from Stable. Fitch has also affirmed CHT's National Long-term rating at 'AAA(twn)' with a Stable Outlook.

The Negative Outlook on the IDRs reflects Fitch's view that CHT's ratings could be adjusted downwards over the next 12-24 months.

"Although CHT will maintain its very strong position in the domestic market, its capability to generate free cash flow (FCF) is likely to be impacted by weakened core earnings mainly because of tariff cuts, increased capex of around TWD30bn each year from 2008-2010 to build up next generation networks and continuous high dividend payouts near 85% of net income," notes Kevin Chang, Associate Director in Fitch's Asia Pacific telecommunications, media and technology team.

The agency indicates that, compared to CHT's post-dividend FCF margin of 14.0% in 2007, a FCF margin below 7% for 2008 could trigger a ratings downgrade. Given that CHT's IDRs are at Fitch's country ceiling for Taiwan, they will be adversely affected by a negative action on Taiwan's Sovereign ratings. Fitch will review any acquisitions or debt-funded investments as an event risk in line with its methodology.

The Outlook for the National Long-term rating remains Stable as Fitch believes CHT's credit risk will continue to be the lowest among all issuers in Taiwan, notwithstanding the potential downgrade of the international ratings. Since it was established in 1996, CHT is the largest integrated telecom operator in Taiwan, generating around half of Taiwan's telecom revenues with diversified businesses in fixed line, mobile, and internet & data services with its extensive network coverage and a large customer base.

Fitch notes that in terms of financial metrics, with the exception of revenue growth, CHT outperformed most other telecom operators in Asia Pacific. CHT's revenue growth potential is curbed by Taiwan's high penetration levels in both fixed and mobile industries. Large market shares have led to CHT's strong profitability and cash flows from operation, which comfortably support its large capital expenditure and dividend payments, leading to consistent FCF. The company has also maintained extremely high interest coverage and a net cash position.

However, CHT's profitability has been and will continue to be affected by tariff reductions, firstly as a result of a requirement by the National Communications Commission of Taiwan, and secondly in consequence of increasing peer competition stemming from the high penetration rates of telecom services in Taiwan. Its EBITDA for the first nine months of 2008 (9M08) fell 2.7% yoy chiefly because its mobile revenues decreased 2.0% yoy (its first official decline in mobile revenues), as subscriber growth was offset by a lower average revenue per user. Down 3.7% yoy in 9M08, its fixed line revenues are likely to decline further with traffic migration to mobile services, competition in the international long distance services and increased use of voice over internet protocol.

Fitch notes CHT had a near monopoly 97.3% subscriber share in Taiwan's fixed line market at end-September 2008. CHT also served 41.9% and 32.0% of GSM and CDMA mobile services subscribers, respectively, and dominates the internet service market with a 68.3% subscriber market share (82.6% in broadband) in Taiwan.

Posted to the site on 10th December 2008