2023-03-07 05:03:32 ET
Summary
- Chunghwa Telecom grew its EPS by 2.4% last year.
- It has a good balance sheet and acceptable margins.
- It is hard to see where growth can continue to come from.
- We find the P/E of 25 to be high compared to other companies.
Investment thesis
In our previous article back in December last year on Chunghwa Telecom ( CHT ) in Taiwan, we gave it a Hold stance.
It does compare well to our holdings in Singtel and China Mobile except when we looked at CHT's P/E compared to that of China Mobile, we find more value in mainland China than in Taiwan.
CHT has published its FY 2022 results and we will go through this to see if there are any new development and also check if it has become better value than before
4Q and FY 2022 Financial Results
CHT ended the year with good growth in Q4 for their mobile revenue share and subscriber share climbed to 39.5% and 36.6%, respectively. The mobile service revenue was up by 5.8% year-over-year. Much of this growth comes from migration to 5G and also from growing the number of subscribers. The average revenue per user, known as ARPU, is also growing.
With traveling starting to pick up after the long pandemic, roaming revenue also saw an increase.
When we look at the internet side of the business, their fixed broadband business revenue increased by 3.7% Y-o-Y in Q4.
Their Enterprise Business Group also saw moderate growth in revenue in Q4 of 2.9%.
Let us look at their total income from operations and net income after taxes yearly.
They grew their income from operations from NT$ 44.9 billion in FY 2021 to NT$ 46.8 billion in FY 2022, which was 4.2%. The net income after taxes attributable to shareholders was NT$36.5 billion. This translates to an EPS of NT$ 4.71 up from NT$ 4.6 the previous year.
With a present share price of NT$118, we get a TTM P/E of 25.
Few companies like to give guidance on further earnings these days.
Fortunately, CHT has given guidance on EPS for 2023. They communicated during the Q4 2022 earnings conference call held on February 2, 2023, that they expect their EPS to be between TWD 4.45 and TWD 4.65.
We also like to look at the free cash flow of a business too.
For CHT, this is pretty good. In 2022 they managed to generate NT$44.4 billion in free cash flow. That was an improvement of 12.4% from the year before.
On top of this, CHT does have an excellent balance sheet with a debt ratio, defined as total debt to total assets, of 24.8%.
Generally, net debt-to-EBITDA ratios of less than 3 are considered acceptable. The lower the ratio, the higher the probability of the firm successfully paying off its debt. Ratios higher than 3 or 4 serve as "red flags" and indicate that the company may be financially distressed in the future.
Since CHT has a negative net debt of NT$17.4 billion, we do not have to worry.
For information their EBITDA last year was NT$86.3 billion.
Risk to the thesis
Geopolitical risks associated with their big brother in mainland China is always going to be there. The people in Taiwan have managed to co-exist since Chang Kai-shek in December of 1949 evacuated China and settled in Taiwan with some 2 million people, consisting mainly of soldiers, members of the ruling Kuomintang, and intellectual and business elites.
Another risk is the limitation to further growth unless they can find other markets overseas.
Conclusion
Despite being a well-managed company, we think CHT is too expensive with a P/E of 25 and we still prefer to own China Mobile and Singtel. These are two telecom companies with much larger footprints.
In order for CHT to get to that size they would have to grow most of their business from outside of Taiwan which in today's geopolitical environment could be challenging.
Our Hold stance remains.
For further details see:
Taiwan's Chunghwa Telecom Is Growing Earnings