Company Quick10K Filing
Chunghwa Telecom
20-F 2019-12-31 Filed 2020-04-17
20-F 2018-12-31 Filed 2019-04-29
20-F 2017-12-31 Filed 2018-04-27
20-F 2016-12-31 Filed 2017-04-25
20-F 2015-12-31 Filed 2016-04-27
20-F 2014-12-31 Filed 2015-04-28
20-F 2013-12-31 Filed 2014-04-28
20-F 2012-12-31 Filed 2013-04-22
20-F 2011-12-31 Filed 2012-04-20
20-F 2010-12-31 Filed 2011-04-20
20-F 2009-12-31 Filed 2010-04-20

CHT 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Stockholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-8.1 a12-9954_1ex8d1.htm
EX-11.1 a12-9954_1ex11d1.htm
EX-12.1 a12-9954_1ex12d1.htm
EX-12.2 a12-9954_1ex12d2.htm
EX-13.1 a12-9954_1ex13d1.htm
EX-13.2 a12-9954_1ex13d2.htm

Chunghwa Telecom Earnings 2011-12-31

Balance SheetIncome StatementCash Flow

20-F 1 a12-9954_120f.htm 20-F

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 


 

(Mark One)

 

o

Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

 

or

 

 

x

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011

 

 

or

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                 to               

 

 

or

 

 

o

Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of event requiring this shell company report

 

Commission file number 001-31731

 


 

Chunghwa Telecom Co., Ltd.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Taiwan, Republic of China

(Jurisdiction of Incorporation or Organization)

 

21-3 Hsinyi Road, Section 1, Taipei, Taiwan, Republic of China

(Address of Principal Executive Offices)

 

Fufu Shen

21-3 Hsinyi Road, Section 1, Taipei,

Taiwan, Republic of China

Tel: +886 2 2344-5488

Fax: +886 2 3393-8188

(Name, Telephone, email and/or Facsimile number and Address of Company Contact Person)

 


 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Shares, par value NT$10 per share

American Depositary Shares, as evidenced by American

Depositary Receipts, each representing 10 Common Shares

 

New York Stock Exchange*

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 



Table of Contents

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 


 

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

7,757,446,545 Common Shares

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other x

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   x Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

o Yes   x No

 


*              Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares

 



Table of Contents

 

CHUNGHWA TELECOM CO., LTD.

 

FORM 20-F ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2011

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

SUPPLEMENTAL INFORMATION

1

 

 

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

1

 

 

PART I

 

2

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

2

 

 

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

2

 

 

 

ITEM 3.

KEY INFORMATION

2

 

 

 

ITEM 4.

INFORMATION ON THE COMPANY

17

 

 

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

65

 

 

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

65

 

 

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

91

 

 

 

ITEM 7.

MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS

100

 

 

 

ITEM 8.

FINANCIAL INFORMATION

101

 

 

 

ITEM 9.

THE OFFER AND LISTING

102

 

 

 

ITEM 10.

ADDITIONAL INFORMATION

105

 

 

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

120

 

 

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

122

 

 

 

PART II

 

123

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

123

 

 

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

123

 

 

 

ITEM 15.

CONTROLS AND PROCEDURES

124

 

 

 

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

126

 

 

 

ITEM 16B.

CODE OF ETHICS

126

 

 

 

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

126

 




Table of Contents

 

SUPPLEMENTAL INFORMATION

 

All references to “we,” “us,” “our” and “our company” in this annual report are to Chunghwa Telecom Co., Ltd. and our consolidated subsidiaries, unless the context otherwise requires. All references to “shares” and “common shares” are to our common shares, par value NT$10 per share, and to “ADSs” are to our American depositary shares, each of which represents ten of our common shares. The ADSs are issued under the deposit agreement, as amended, supplemented or modified from time to time, originally dated as of July 17, 2003, among Chunghwa Telecom Co., Ltd. and the Bank of New York, and amended and restated on November 14, 2007, among Chunghwa Telecom Co., Ltd. and JP Morgan Chase Bank, as depository, and the holders and beneficial owners of American Depositary Receipts issued thereunder. All references to “Taiwan” are to the island of Taiwan and other areas under the effective control of the Republic of China. All references to “the government” or “the Republic of China government” are to the government of the Republic of China. All references to the “Ministry of Transportation and Communications” are to the Ministry of Transportation and Communications of the Republic of China. All references to the “Securities and Futures Bureau” are to the Securities and Futures Bureau of the Republic of China or its predecessors, as applicable. “R.O.C. GAAP” means the generally accepted accounting principles of the Republic of China, and “U.S. GAAP” means the generally accepted accounting principles of the United States. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. Unless otherwise indicated, or the context otherwise requires, references in this annual report to financial and operational data for a particular year refer to the fiscal year of our company ending December 31 of that year.

 

When we refer to our “privatization” or our being “privatized” in this annual report, we mean our status as a non-state-owned entity after the government reduced its ownership of our outstanding common shares, including our common shares owned by entities majority-owned by the government, to less than 50%. We were privatized in August 2005.

 

We publish our consolidated financial statements in New Taiwan dollars, the lawful currency of the Republic of China. In this annual report, “NT$” and “NT dollars” mean New Taiwan dollars, “$”, “US$” and “U.S. dollars” mean United States dollars.

 

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

 

This annual report contains forward-looking statements, including statements regarding:

 

·                  our business and operating strategy;

 

·                  our network expansion plans;

 

·                  our business, operations and prospects;

 

·                  our financial condition and results of operations;

 

·                  our dividend policy;

 

·                  the telecommunications industry regulatory environment in Taiwan; and

 

·                  future developments in the telecommunications industry in Taiwan.

 

These forward-looking statements are generally indicated by the use of forward-looking terminology such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “aim,” “seek,” “project,” “may,” “will” or other similar words that express an indication of actions or results of actions that may or are expected to occur in the future. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions, many of which are beyond our control. The forward looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward looking statements largely

 

1



Table of Contents

 

on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. You should not place undue reliance on these statements, which apply only as of the date of this annual report. These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences include, but are not limited to, those discussed under “Item 3. Key Information—D. Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements. The forward looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

 

PART I

 

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                KEY INFORMATION

 

We were privatized as a result of a secondary ADS offering and concurrent domestic auction of our common shares on August 12, 2005. The privatization has enabled us to develop our business and respond to changing market conditions more rapidly and efficiently.

 

A. Selected Financial Data

 

The selected income statement data and cash flow data for the years ended December 31, 2009, 2010 and 2011, and the selected balance sheet data as of December 31, 2010 and 2011 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the related notes. The selected income statement and cash flow data for the years ended December 31, 2007 and 2008, and the selected balance sheet data as of December 31, 2007, 2008 and 2009 set forth below, are derived from our audited consolidated financial statements not included in this annual report. The consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the Republic of China, or R.O.C. GAAP, which differ in some material respects from accounting principles generally accepted in the United States of America, or U.S. GAAP, as further explained under note 36 to our consolidated financial statements included herein.

 

 

 

Year Ended December 31,

 

 

 

2007(1)

 

2008(1)

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions, except for percentages and per share and per pro forma ADS data)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

R.O.C GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

197.4

 

201.7

 

198.4

 

202.4

 

217.5

 

7.2

 

Operating costs(1)

 

(106.7

)

(113.5

)

(112.7

)

(115.3

)

(131.5

)

(4.4

)

Gross profit

 

90.7

 

88.2

 

85.7

 

87.1

 

86.0

 

2.8

 

Operating expenses(1)

 

(30.4

)

(29.6

)

(29.3

)

(29.7

)

(30.9

)

(1.0

)

Income from operations

 

60.3

 

58.6

 

56.4

 

57.4

 

55.1

 

1.8

 

Non-operating income and gains(2)

 

2.5

 

3.4

 

1.4

 

1.0

 

1.9

 

0.1

 

Non-operating expenses and losses(2)

 

(1.0

)

(2.3

)

(0.6

)

(0.7

)

(0.3

)

 

Income before income tax

 

61.8

 

59.7

 

57.2

 

57.7

 

56.7

 

1.9

 

Income tax expense

 

(13.1

)

(13.9

)

(12.7

)

(9.1

)

(8.6

)

(0.3

)

Consolidated net income

 

48.7

 

45.8

 

44.5

 

48.6

 

48.1

 

1.6

 

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders of the parent

 

48.2

 

45.0

 

43.8

 

47.6

 

47.1

 

1.6

 

Minority interests

 

0.5

 

0.8

 

0.7

 

1.0

 

1.0

 

 

 

 

48.7

 

45.8

 

44.5

 

48.6

 

48.1

 

1.6

 

 

2



Table of Contents

 

 

 

Year Ended December 31,

 

 

 

2007(1)

 

2008(1)

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions, except for percentages and per share and per pro forma ADS data)

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

4.94

 

4.64

 

4.51

 

4.91

 

6.04

 

0.20

 

Diluted

 

4.93

 

4.63

 

4.50

 

4.89

 

6.03

 

0.20

 

Earnings per ADS equivalent:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

49.35

 

46.42

 

45.16

 

49.10

 

60.43

 

2.00

 

Diluted

 

49.35

 

46.31

 

45.01

 

48.95

 

60.25

 

1.99

 

US GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

200.9

 

204.4

 

200.4

 

203.8

 

218.3

 

7.2

 

Operating costs and expenses

 

(138.1

)

(147.1

)

(141.8

)

(145.2

)

(161.2

)

(5.3

)

Income from operations

 

62.8

 

57.3

 

58.6

 

58.6

 

57.1

 

1.9

 

Non-operating income, net(2)

 

1.5

 

1.4

 

0.8

 

0.6

 

1.3

 

 

Income before income tax

 

64.3

 

58.7

 

59.4

 

59.2

 

58.4

 

1.9

 

Income tax expense

 

(14.5

)

(14.5

)

(13.6

)

(10.0

)

(9.0

)

(0.3

)

Consolidated net income

 

49.8

 

44.2

 

45.8

 

49.2

 

49.4

 

1.6

 

Attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders of the parent

 

49.5

 

43.7

 

45.1

 

48.3

 

48.4

 

1.6

 

Noncontrolling interests

 

0.3

 

0.5

 

0.7

 

0.9

 

1.0

 

 

 

 

49.8

 

44.2

 

45.8

 

49.2

 

49.4

 

1.6

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

5.08

 

4.52

 

4.65

 

4.98

 

6.22

 

0.21

 

Diluted

 

5.08

 

4.51

 

4.64

 

4.96

 

6.20

 

0.20

 

Earnings per ADS equivalent:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

50.81

 

45.19

 

46.51

 

49.78

 

62.17

 

2.05

 

Diluted

 

50.80

 

45.09

 

46.36

 

49.64

 

62.00

 

2.05

 

 

 

 

As of December 31,

 

 

 

2007(1)

 

2008(1)

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions, except for percentages and per share and per pro forma ADS data)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

R.O.C GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

60.6

 

48.3

 

54.8

 

48.5

 

47.3

 

1.6

 

Long-term investments

 

5.6

 

8.9

 

9.1

 

13.9

 

19.9

 

0.7

 

Properties

 

330.8

 

323.0

 

313.0

 

305.7

 

302.6

 

10.0

 

Goodwill

 

0.2

 

0.2

 

0.3

 

0.3

 

0.2

 

 

Total assets

 

469.6

 

463.6

 

449.0

 

454.3

 

442.9

 

14.6

 

Short-term loans

 

 

0.3

 

0.8

 

0.1

 

0.1

 

 

Short-term bills payable

 

 

 

 

0.2

 

 

 

Current portion of long-term loans

 

 

 

0.1

 

0.3

 

0.7

 

 

Long-term loans(3)

 

 

 

0.2

 

3.1

 

1.1

 

 

Deferred income

 

1.5

 

2.1

 

2.5

 

2.6

 

2.6

 

0.1

 

Other liabilities

 

11.0

 

11.8

 

7.5

 

7.5

 

6.9

 

0.2

 

Total liabilities

 

71.8

 

83.9

 

70.0

 

85.7

 

69.9

 

2.3

 

Capital stock

 

96.7

 

97.0

 

97.0

 

77.6

 

77.6

 

2.6

 

Cash dividend on common shares

 

34.6

 

40.7

 

37.1

 

39.4

 

42.9

 

1.4

 

Equity attributable to stockholders of the parent

 

395.0

 

376.6

 

375.2

 

364.6

 

368.7

 

12.2

 

Minority interests in subsidiaries

 

2.8

 

3.1

 

3.8

 

4.0

 

4.3

 

0.1

 

US GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

406.2

 

400.7

 

385.4

 

390.5

 

379.4

 

12.5

 

Total liabilities

 

85.7

 

94.8

 

78.9

 

94.4

 

78.0

 

2.6

 

Capital stock

 

96.7

 

97.0

 

97.0

 

77.6

 

77.6

 

2.6

 

Equity attributable to stockholders of the parent

 

317.8

 

302.8

 

302.8

 

292.2

 

297.3

 

9.8

 

Noncontrolling interests

 

2.7

 

3.1

 

3.7

 

3.9

 

4.1

 

0.1

 

 

3



Table of Contents

 

 

 

Year Ended December 31,

 

 

 

2007(1)

 

2008(1)

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions, except for percentages and per share and per pro forma ADS data)

 

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

R.O.C GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

89.0

 

91.9

 

77.3

 

84.8

 

75.3

 

2.5

 

Net cash used in investing activities

 

(38.6

)

(34.5

)

(29.5

)

(17.4

)

(33.1

)

(1.1

)

Net cash used in financing activities

 

(44.3

)

(52.3

)

(56.5

)

(47.0

)

(65.7

)

(2.2

)

Net increase (decrease) in cash and cash equivalents

 

5.6

 

5.1

 

(8.0

)

17.6

 

(23.5

)

(0.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

R.O.C GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin(4)

 

46

%

44

%

43

%

43

%

39

%

39

%

Operating margin(5)

 

31

%

29

%

28

%

28

%

25

%

25

%

Net margin(6)

 

24

%

22

%

22

%

24

%

22

%

22

%

Capital expenditures

 

25.1

 

30.1

 

25.5

 

24.6

 

26.9

 

0.9

 

Depreciation and amortization

 

39.8

 

38.2

 

36.3

 

34.1

 

32.3

 

1.1

 

Cash dividends declared per share

 

4.26

(7)

3.83

(7)

4.06

(7)

5.52

(7)

5.46

(8)

0.18

(8)

Stock dividends declared per share

 

2.10

 

1.00

 

 

 

(8)

(8)

 


(1)         As a result of the adoption of Interpretation 96-052 issued by the Accounting and Research Development Foundation, or ARDF, in the Republic of China, beginning from January 1, 2008, bonuses paid to employees, directors, and supervisors are recognized as an expense rather than an appropriation of earnings, and we accrued NT$1,891 million, NT$1,964 million, NT$2,358 million and NT$2,344 million (US$77.4 million) in 2008, 2009, 2010 and 2011, respectively. Some portion of the aforementioned amounts of NT$41 million, NT$39 million, NT$46 million and NT$49 million (US$1.6 million) were capitalized as part of property, plant and equipment. Interpretation 96-052 is effective for the financial statements beginning after January 1, 2008, thus we did not retrospectively restate our financial statements for the year of 2007.

(2)         Includes interest income of NT$1,453 million, NT$1,916 million, NT$479 million, NT$475 million and NT$682 million (US$22.5  million) for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 respectively, and interest expense of NT$15 million, NT$4 million, NT$15 million. NT$107 million and NT$31 million (US$1.0  million) for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 respectively.

(3)         Excludes current portion of long-term loans.

(4)         Represents gross profits divided by net revenues.

(5)         Represents income from operations divided by net revenues.

(6)         Represents net income attributed to stockholders of the parent divided by net revenues.

(7)         Dividends for 2007, 2008, 2009 and 2010, in U.S. dollars were US$0.13, US$0.12, US$0.14 and US$0.18, respectively. The amounts were calculated using the exchange rates of the subsequent years for convenience translation.

(8)         Dividends for 2011 are expected to be declared at our 2012 annual general stockholders’ meeting scheduled for June 2012.

 

Currency Translations and Exchange Rates

 

For the convenience of readers, NT dollar amounts used in this annual report for, and as of, the year ended December 31, 2011 have been translated into U.S. dollar amounts using US$1.00=NT$30.27, set forth in the statistical release of the Federal Reserve Board on December 30, 2011. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount. We make no representation that any New Taiwan dollar amounts or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or New Taiwan dollars, as the case may be, at any particular rate or at all. On April 13, 2012, the exchange rate was NT$29.48 to $1.00.

 

The following table sets forth, for each of the periods indicated, the low, average, high and period-end exchange rates of the New Taiwan dollar, expressed in New Taiwan dollar per U.S. dollar. These rates are provided

 

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solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

 

Year Ended December 31,

 

Average(1)

 

High

 

Low

 

At Period
End

 

2007

 

32.41

 

33.41

 

32.26

 

32.43

 

2008

 

31.51

 

33.58

 

29.99

 

32.76

 

2009

 

33.02

 

35.21

 

31.95

 

31.95

 

2010

 

31.50

 

32.43

 

29.14

 

29.14

 

2011

 

29.42

 

30.67

 

28.50

 

30.27

 

October

 

30.26

 

30.67

 

29.86

 

29.91

 

November

 

30.22

 

30.43

 

30.02

 

30.31

 

December

 

30.25

 

30.28

 

30.10

 

30.27

 

2012 (through April 13)

 

29.49

 

30.28

 

29.37

 

29.48

 

January

 

29.99

 

30.28

 

29.61

 

29.61

 

February

 

29.53

 

29.65

 

29.37

 

29.37

 

March

 

29.52

 

29.61

 

29.37

 

29.50

 

April (through April 13)

 

29.50

 

29.55

 

29.45

 

29.48

 

 


Source:      Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System.

(1)         Annual averages are calculated using the average of exchange rates on the last day of each month during the period. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.

 

Risks Relating to Our Company and the Taiwan Telecommunications Industry

 

The recent global macroeconomic events could cause disruptions to our customers and their demand for telecommunications services. Demand for our products has been, and will continue to be, adversely affected by overall macroeconomic conditions.

 

The recent global macroeconomic events could have a negative impact on businesses around the world. For example, on August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. In addition, the ongoing European sovereign debt crisis that started in 2009 has also had a negative impact on the credit ratings of several European countries and general market sentiment. These downgrades could have material adverse impacts on financial markets and economic conditions throughout the world. In general, the recent global economic crisis has caused weak consumer confidence and diminished consumer and business spending, which have had a negative impact on the general market demand for telecommunications services around the world.. As exports account for a significant portion of Taiwan’s economy, any global macroeconomic recessions could also have a significant impact on Taiwan’s economy. These recent global macroeconomic events could have a material adverse effect on our results of operations and business prospects and cause the trading price of our common shares and ADSs to decline.

 

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As an internet service provider, we may not be able to protect our customers and their information from cyber attacks, nor protect our services from disruptions due to cyber security breaches. Since we also provide value-added services via the internet, we may also be subject to administrative penalties due to our failure to protect public interest from harmful content on the internet.

 

As an internet service provider, our system is susceptible to cyber security risks, including hijack attacks, phishing attacks, hacker’s intrusions to steal customer’s information and distributed denial-of-service (DDoS) attacks. Our online services such as e-bills and multiple payment options through the internet are also vulnerable to cyber attacks. These attacks may disrupt our services and cause leakage of our customers’ personal information, which may result in significant damages and material adverse effect to our customers and our operations. We cannot assure you that our data protection measures are sufficient to prevent any data leakage or disruption of our service due to cyber attacks. We may suffer negative consequences, such as remedial costs, increased cybersecurity protection costs, lost revenues, litigation and reputational damage due to cyber attacks.

 

Furthermore, the R.O.C. legislator may, from time to time, imposes obligations on us for protecting public interest from harmful content on the internet. For example, according to the newly amended R.O.C. Children and Youth Welfare Act that became effective on November 30, 2011, we are required to take precautionary measures to protect minor children from accessing to offensive or obscene content on internet that is harmful for their physical and mental health. If we fail to comply with these requirements, we may be subject to administrative fines ranging from NT$60,000 to NT$300,000.

 

Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.

 

As a telecommunications service provider in Taiwan, we are subject to extensive regulation. See “Item 4. Information on the Company—B. Business Overview—Regulation” for a discussion of the regulatory environment applicable to us. Any changes in the regulatory environment applicable to us may adversely affect our business, financial condition and results of operations.

 

Currently, our regulator is the National Communications Commission, or the NCC, which was formed on March 1, 2006 in accordance with the National Communications Commission Organization Law, or the NCC Organization Law, which was intended to transfer regulatory authority over the Taiwan telecommunications industry from the Ministry of Transportation and Communications and the Directorate General of Telecommunications to the National Communications Commission.

 

We have been designated by the government as a dominant provider of fixed communications and mobile services within the meaning of applicable telecommunications regulations, and as a result, we are subject to special additional requirements imposed by the National Communications Commission. For example, the regulation governing the setting and changing of tariffs allows non-dominant telecommunications service providers greater freedom to set and change tariffs within the range set by the government. If we are unable to respond effectively to tariff changes by our competitors, then our competitiveness, market position and profitability will be materially and adversely affected. According to the Fixed Network Regulations, we are still required to submit a report to the National Communications Commission within 20 days after our shareholders approves the entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations, the transfer of the whole or substantial part of our business or assets; taking over of the whole of the business or assets of any other company which would have significant impact on our operations. The National Communications Commission also amended the Wireless Regulations and the Third Generation Mobile Telecommunications on April 3, 2009 to impose a similar requirement requiring us to submit a report within 20 days after our shareholders approves one of the above matters or our capital reduction. We were subject to the Statute of Chunghwa Telecom Co., Ltd. prior to our privatization. Although we have been privatized, the Legislative Yuan has not yet abolished the Statute of Chunghwa Telecom Co., Ltd., and at this time, the Statute of Chunghwa Telecom Co., Ltd. is still applicable to us. Under the Statute of Chunghwa Telecom Co., Ltd., the Ministry of Transportation and Communications has the authority to regulate aspects of our business. Any such regulation could be burdensome or conflict with regulations of the National Communications Commission or may otherwise adversely affect our business, financial condition and results of operations. The regulatory framework within which we operate may limit

 

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our flexibility to respond to market conditions, competition or changes in our cost structure. In particular, future decreases in tariff rates could immediately and substantially decrease our revenues. In particular, as a Type I service provider under the Republic of China Telecommunications Act, or Telecommunications Act, we are constrained in our ability to raise prices. For instance, the National Communications Commission adopted a three-year price reduction plan from April 2007 to March 2010 and a second round three-year price reduction plan from April 2010 to March 2013, resulting in a number of price reductions in the tariff structures relating to our domestic fixed communications and mobile communications services. See “Item 5. Operating and Financial Review and Prospects—Overview—Tariff Adjustments”. We cannot assure you that we will not be required to further reduce our tariffs again in the future. Any mandatory tariff reductions could have a material adverse effect on our revenues. In addition, as requested by Legislative Yuan and National Communications Commission, we implemented a discounted tariff for telecommunication services from Kinmen, Matsu and Penghu Islands to Taiwan in April 1, 2011. We further applied one single tariff to all the telecommunication services for the entire country since January 2012. Due to such adjustment of tariff, telecommunication services which  used to be charged as long-distance telecommunication are now charged at a lower rate. Such adjustment of our tariff may have material adverse effect on the revenues of our fixed communications business.

 

According to a domestic news article, an official from the NCC was publicly quoted saying that he believed that the Telecommunications Act should be amended to force us to implement network separation of the last mile network infrastructure to promote competition.  Network separation would force us to divest our last-mile network infrastructure, so all telecommunications providers would have equal competition and access to the last-mile network infrastructure.  Although there is no definitive proposal being discussed by the NCC yet, any type of forced network separation could have a material adverse effect on our business and results of operations.

 

If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.

 

We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer. For example, there are currently three mobile network operators that offer 2G mobile services in Taiwan. The licenses granted by the R.O.C. government authorities for operating 2G mobile services on the 900MHz and 1800MHz spectrum can be extended to June 2017 based on operator’s request for extension, according to Executive Yuan’s announcement on November 22, 2010. We filed a request with the NCC to extend our 2G license to June 2017 on November 29, 2011, which is currently under review by the NCC. The Executive Yuan also announced that the rights to use the 2G frequency spectrum will be sold at an auction for technology neutral usage and further announced in November 2010 that the 4G license auction will be held before June 2015. However, according to a recent domestic media report, the timing for the 4G license auction could be advanced to June 2014. We cannot assure you that we will be able to extend the validity of our licenses or obtain the licenses that we need in the future.  If we are unable to successfully acquire the rights to use the frequency spectrum that we need for our future business operations, our business prospects and future results of operations may be adversely affected which as a result may lead to a material impact on our business revenues.

 

We have been investigated and fined by the R.O.C. Fair Trade Commission in the past and may continue to be investigated and fined in the future.

 

As a provider of telecommunication products and services, our business operations are subject to the regulations of the R.O.C Fair Trade Act, or the FTA, which is administered and enforced by the R.O.C. Fair Trade Commission, or the FTC. The FTA requires, among other things, that the marketing and promotional materials of a business to be true and not misleading.  The FTA also prohibits a business from participating or engaging in a cartel or other anti-competitive conduct.  The FTC has the authority under the FTA to investigate and, where appropriate, impose fines and penalties on a business that violates the FTA. The consequences of violating the FTA, depending on the nature of the violation, could be severe.  If the FTC holds a business accountable for making a false or misleading representation in any of its advertisements, it could order the business to stop the distribution or sale of the products or services in question and take other remedial or corrective measures, such as the imposition of monetary fines ranging from NT$50,000 to NT$25,000,000.  If the FTC finds a business liable for participating in a

 

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cartel, the FTC could order the business to cease its anti-competitive practices and impose a monetary fine of up to 10% of the gross sales of the business for the most recent fiscal year.

 

In March 2012, the FTC found us liable for providing misleading representations on the speed of our 50Mbps fiber broadband products in certain advertisements. The FTC consequently ordered us to stop using the relevant advertisements immediately and pay a fine of NT$5 million. As the FTA provides the FTC broad discretion to interpret anti-competition actions and enforce the relevant clauses under the FTA, we are unable to predict whether the FTC would initiate investigation on any of our daily business activities or find us liable for violating the FTA in the future. The investigations of and penalties imposed by the FTC could interrupt our provision of products or services and have a negative impact on our reputation, business operations and results of operations.

 

Increasing market competition may adversely affect our growth and profitability by causing us to lose customers, charge lower tariffs or spend more on marketing.

 

Mobile service providers in Taiwan have been offering 3G mobile services for several years. Smart phones with mobile data packages are becoming popular in recent years. To attract more high-end data users, the other two major operators started to offer free intra-network calling packages bundled with mobile data service. We also adopted comparable promotion packages to attract and maintain our customers. We cannot assure you that the intensified market competition will not affect our growth and profitability.

 

We also face increased broadband competition from cable operators. Cable operators have been using low-priced internet access packages to attract new customers in specific areas and buildings in Taiwan. They have also been upgrading their networks to DOCSIS 3.0 in order to provide higher speed internet access. DOCSIS refers to Data Over Cable Service Interface Specification, which is an international telecommunications standard that permits the addition of high-speed data transfer to an existing cable TV system. To counter these developments, we keep migrating more of our ADSL customers to FTTx services and to provide even higher speed FTTH access.  The government has mandated the digitization of cable television networks by 2014. In addition, the draft Cable Radio and Television Act proposes to remove the zoning restrictions on service area for cable operators, while cable operators remain subject to the restriction that the market share of any single cable operator cannot exceed one third. This draft has been approved by the Executive Yuan and submitted to the Legislative Yuan. As cable operators will be allowed to provide digital cable services throughout Taiwan and be able to provide high definition cable TV with more channels as well as high speed cable modem services, we could face increased competition for our broadband access services and multimedia on demand, or MOD IPTV services. If we are unable to compete successfully with the cable operators for broadband access services and MOD businesses, our results of operations could be impacted.

 

Many of our competitors are in alliances with leading international telecommunications service providers   and have access to financial and other resources or technologies that may not be available to us. Moreover, as the government continues to liberalize the telecommunications market, such as through the issuance of new licenses or establishment of additional networks, our market position and competitiveness could be materially and adversely affected. We cannot guarantee that our measures to address competition will be effective and our business, financial condition and results of operations may be adversely affected by our competition.

 

Increasing competition may also cause the rate of our customer growth to reverse or decline, bring about further decreases in tariff rates and necessitate increases in our selling and promotional expenses. Any of these developments could adversely affect our business, financial condition and results of operations.

 

If we fail to maintain our service quality due to insufficient network capacity, our revenue growth, profitability and reputation may suffer.

 

In 2011, there were complaints from the general public about our mobile data network congestion.  To address the situation, we adopted measures such as offering a 20% discount of the mobile data monthly fees until the end of 2012 for customers whose monthly data usage volume was less than one gigabyte, constructing additional base stations with HSPA+ capability and increasing the number of WiFi access points to offload data usage from our mobile data network.  However, we cannot assure you that these measures will be able to adequately address the mobile data network congestion.  Although we will continue to enhance our network quality and capacity in the

 

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future, data usage has been increasing as well, so we cannot assure you that we will be able to keep pace with the growth in data usage.  If the quality of our service decreases due to insufficient network capacity, our business, results of operations and reputation could be materially and adversely affected.  In addition, we may also be sanctioned by the regulatory authorities and may be forced to devote more capital expenditures to resolve these problems.

 

If we fail to maintain a good relationship with our labor union, work stoppages or labor unrest could occur and the quality of our services as well as our reputation could suffer.

 

In accordance with the articles of association of Chunghwa Telecom Workers Union, besides the chief manager of each department, all of our employees are members of our principal labor union, the Chunghwa Telecom Workers Union. Since our incorporation in 1996, we have experienced disputes with our labor union on such issues as employee benefits and retirement benefits in connection with our privatization as well as the right to protest. Despite having taken measures to improve relations, increase cooperation and ensure mutual benefit with our labor union, such as increasing channels of communications by holding periodic labor resource review meetings and guaranteeing a labor union seat on our board of directions, we cannot assure you that we will be able to maintain a good relationship with our labor union. Any deterioration of our relationship with our labor union could result in work stoppages, strikes or threats to take such an action, which could disrupt our business and operations, and materially and adversely affect the quality of our services and harm our reputation.

 

We may not realize the benefits we expect from our investments, and this may materially and adversely affect our business, financial condition, results of operations and prospects.

 

We have made significant capital investments in our network infrastructure and information technology systems to provide the services we offer. In 2011, we made capital expenditures for our domestic fixed communications of NT$16.6 billion (US$547.4 million), our mobile communications business of NT$4.3 billion (US$143.2 million), our internet business of NT$3.8 billion (US$123.7 million), our international fixed communications business of NT$1.5 billion (US$50.5 million) and our other businesses of NT$0.7 billion (US$23.1 million). In order to continue to develop our business and offer new and more sophisticated services, we intend to continue to invest in these areas as well as new technologies. The launch of new and commercially viable products and services is important to the success of our business. We expect to incur substantial capital expenditures to further develop our range of services and products. Commercial acceptance by consumers of new and more sophisticated services we offer may not occur at the rate or level expected, and we may not be able to successfully adapt these services to effectively and economically meet our customers’ demand, thus impairing our expected return from our investments.

 

We cannot assure you that services enabled by new technologies we are implementing, such as HSPA/ HSPA+ mobile technology, will be accepted by the public to the extent required to generate an acceptable rate of return. In addition, we could face the risk of unforeseen complications in the deployment of these new services and technologies, and we cannot assure you that we will not exceed our estimate of the necessary capital expenditure to offer such services. New services and technologies may not be developed and/or deployed according to expected schedules or may not achieve commercial acceptance or be cost effective. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent we are required under applicable accounting standards to recognize a charge for impairment of assets. Any such charge could materially and adversely affect our financial condition and results of operations.

 

We may also from time to time make equity investments in companies, but we cannot assure you of their profitability. We cannot assure you that losses related to our equity investments will not have a material adverse effect on our financial condition or results of operations.

 

In 2011, we recognized an other-than-temporary impairment loss of NT$148 million (US$4.9 million) for financial assets carried at cost due to adverse changes in market conditions and operating performance that was below expectations. We may be required to record additional impairment charges in future periods, which may have a material adverse effect on our financial condition and future results of operations.

 

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Changes in technology may render our current technologies obsolete or require us to obtain licenses for introducing new services or make substantial capital investments, financing for which may not be available to us on favorable commercial terms or at all.

 

The Taiwan telecommunications industry has been characterized by rapid increases in the diversity and sophistication of the technologies and services offered. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services in order to respond to competitive industry conditions and customer requirements. Developments of new technologies have rendered some less advanced technologies unpopular or obsolete. If we fail to develop, or obtain timely access to, new technologies and equipment, or if we fail to obtain the necessary licenses to provide services using these new technologies, we may lose our customers and market share and become less profitable.

 

In addition, the cost of implementing new technologies, upgrading our networks or expanding capacity could be significant. In particular, we have made and will continue to make substantial capital expenditures in the near future in order for us to effectively respond to technological changes, such as the continued expansion of our fiber optic networks and High Speed Packet Access, or HSPA, and HSPA+ mobile network. Furthermore, the 4G licenses are scheduled to be awarded before June 2015. We expect to devote additional capital expenditure to the network building for Long Term Evolution, or LTE, network. In addition, to meet the increasingly robust high-bandwidth requirements of digital convergence services, we will expand construction of fiber optic networks, including passive optical networks, or PONs and optical distribution networks, or ODNs. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain additional financing on favorable commercial terms will depend on a number of factors. These factors include our financial condition, results of operations, cash flows and the prevailing market conditions in the Taiwan and international telecommunications industry, the cost of financing and conditions in the financial markets, and the issuance of relevant government and other regulatory approvals. Any inability to obtain funding for our capital expenditures on commercially acceptable terms could jeopardize our expansion plans and materially and adversely affect our business prospects and future results of operations.

 

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural disasters.

 

Taiwan is susceptible to earthquakes and typhoons. However, we do not carry any insurance to cover damages caused by earthquakes, typhoons or other natural disasters or any resulting business interruption. Our services are currently carried through our fixed and mobile communications networks, as well as through our transmission networks consisting of optical fiber cable, microwave, submarine cable and satellite transmission links, which could be vulnerable to damage or interruptions in operations due to natural disasters. For example, in 2011, losses on property, plant and equipment arising from natural disasters such as earthquakes and typhoons were approximately NT$1.0 million (US$0.03 million) as recorded in non-operating expenses under R.O.C GAAP. The occurrence of any natural disasters could impact our ability to deliver services and have a negative effect on our results of operations.

 

If new technologies adopted by us do not perform as expected, or if we are unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth and profitability will decline.

 

We are always evaluating new growth opportunities in the broader telecommunications industry and are expecting to be transformed into an Information and Communications Technology, or ICT, service provider. Some of these opportunities involve new services for which there are no proven markets, and may not develop as expected. Our ability to deploy and deliver these services will depend, in many instances, on new and unproven technologies. These new technologies may not perform as expected or generate an acceptable rate of return. In addition, we may not be able to successfully develop new technologies to effectively and economically deliver these services, or be able to compete successfully in the delivery of telecommunications services based on new technologies. Furthermore, the success of our mobile data services is substantially dependent on the availability of  mobile data applications and devices that are being developed by third-party developers. These applications or devices may not be sufficiently developed to support the deployment of our mobile data services. If we are unable to

 

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deliver commercially viable services based on the new technologies that we adopt, our financial condition and results of operations may be materially and adversely affected.

 

We depend on select personnel and could be affected by the loss of their services.

 

We depend on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. In particular, we are not insured against the loss of any of our personnel. Moreover, we may be required to increase substantially the number of these employees in connection with any expansion, and there is intense competition for experienced personnel in the Taiwan telecommunications industry. We may not be able to retain our present personnel or attract additional qualified personnel as and when needed. In addition, we may need to increase employee compensation levels in order to attract and retain personnel. We cannot assure you that the loss of the services of any of these personnel would not disrupt our business and operations and materially and adversely affect the quality of our services and harm our reputation.

 

Our largest stockholder may take actions that conflict with our public stockholders’ best interests.

 

As of December 31, 2011, the Republic of China government, through the Ministry of Transportation and Communications, owned approximately 35.29% of our outstanding common shares. Accordingly, the government, through its control over our board, as all non-independent board members were appointed by the Ministry of Transportation and Communications, may continue to have the ability to control our business, including matters relating to:

 

·                  any sale of all or substantially all of our assets;

 

·                  the approval of our annual operation and projects budget;

 

·                  the composition of our senior management;

 

·                  the timing and distribution of dividends;

 

·                  the election of a majority of our directors and supervisors; and

 

·                  our business activities and direction.

 

We cannot assure you that our largest shareholder will not take actions that impair our ability to conduct our business competitively or conflict with the best interests of our public stockholders.

 

Actual or perceived health risks related to mobile handsets and base stations could lead to decreased mobile service usage and difficulties in increasing network coverage and could expose us to potential liability.

 

According to some published reports, the electromagnetic signals from mobile handsets and cellular base stations may pose health risks or interfere with the operation of electronic equipment. Although the findings of those reports are disputed, actual or perceived risks of using mobile communications devices or of cellular base stations could have a material adverse effect on mobile service providers, including us. For example, our customer base could be reduced, our customers may reduce their usage of our mobile services, we could encounter difficulties in obtaining sites for additional cellular base stations required to expand our network coverage or we may be requested to reduce the number of existing cellular base stations. As a result, our mobile services business may generate less revenues and our financial condition and results of operations may be materially and adversely affected. In addition, we could be exposed to potential liability for any health problems caused by mobile handsets and base stations.

 

We are subject to litigation that could expose us to substantial liabilities.

 

We are from time to time involved in litigation, arbitration or administrative proceedings in the ordinary course of our business. See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings.”

 

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We cannot predict the outcome of these proceedings, and we cannot assure you that if a judgment is rendered against us in any or all of these proceedings, our financial condition and results of operations would not be materially and adversely affected.

 

Investor confidence in us may be adversely impacted if we or our independent registered public accountants are unable to attest to or express an unqualified opinion on the effectiveness of our internal control over financial reporting.

 

We are subject to the reporting requirements of the SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring U.S. public companies to include a report of management on our internal control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of our internal control over financial reporting. The effectiveness of internal control over financial reporting has been audited by Deloitte & Touche, an independent registered public accounting firm, who has also audited our consolidated financial statements for the year ended December 31, 2011. Deloitte & Touche has issued an attestation report on the effectiveness of our internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). See “Item 15. Controls and Procedures— Attestation Report of the Registered Public Accounting Firm.”

 

While the management report included in this annual report concluded that our internal control over financial reporting was effective, we cannot assure you that our management will be able to conclude that our internal control over financial reporting is effective in future years. If in future years we fail to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor confidence in the reliability of our consolidated financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our stockholders or otherwise harm our reputation.

 

Any further economic downturn or decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects.

 

We conduct most of our operations and generate most of our revenues in Taiwan. As a result, any decline in the Taiwan economy or a decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects. The current European debt crisis and related financial restructuring efforts, including in Greece, Italy, Spain, Portugal and Ireland, are contributing to instability in global financial markets, which adversely affects consumer confidence, the cost of borrowing and economic activity. The global slowdown in technology expenditures has also from time to time adversely affected the Taiwan economy, which is highly dependent on the technology industry. As our business is significantly dependent on economic growth, any uncertainty or further deterioration in economic conditions could have a material adverse effect on our financial condition and results of operations. We cannot assure you that economic conditions in Taiwan will continue to improve in the future or that our business and operations will not be materially and adversely affected by deterioration in the Taiwan economy.

 

We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between the Republic of China and the People’s Republic of China, which could adversely affect our financial condition and results of operations.

 

Our principal executive offices and substantially all of our assets are located in Taiwan, and substantially all of our revenues are derived from our operations in Taiwan. Accordingly, our business, financial condition and results of operations and the market price of our common shares and the ADSs may be affected by changes in Republic of China governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The People’s Republic of China, or PRC, claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between the Republic of China and the PRC, such as the engagement of Economic Cooperation Framework Agreement (ECFA) in 2010, relations may become strained again. The PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Republic of China and the PRC have on occasion depressed the

 

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market prices of the securities of companies in the Republic of China. Relations between the Republic of China and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the R.O.C. and PRC require companies involved in cross-strait business operations to carefully monitor its actions and manage its relationships with both R.O.C. and PRC governments. In the past, companies in the R.O.C., including us, have received minor sanctions such as travel restrictions or minor monetary fines by the R.O.C. and/or PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the R.O.C. and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.

 

Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

 

Any future outbreak of contagious diseases, such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, including Taiwan, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.

 

Stockholders may have more difficulty protecting their interests under the laws of the Republic of China than they would under the laws of the United States.

 

Our corporate affairs are governed by our articles of incorporation, the Telecommunications Act, and by the laws governing corporations incorporated in the Republic of China. In addition, our corporate affairs may remain governed by the Statute of Chunghwa Telecom Co., Ltd. See “—Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.” The rights of stockholders and the responsibilities of management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders. As a result, holders of our common shares and ADSs may have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of directors than they would as public stockholders of a United States corporation.

 

Risks Relating to Ownership of Our ADSs and Common Shares

 

The value of your investment may be reduced by future sales of our ADSs or common shares by us, by the Republic of China government or by other stockholders.

 

The government may continue to sell our common shares. Sales of substantial amounts of ADSs or common shares by the government or any other stockholder in the public market, or the perception that future sales may occur, could depress the prevailing market price of our ADSs and common shares.

 

The market value of your investment may fluctuate due to the volatility of, and government intervention in, the Taiwan securities market.

 

Our common shares are traded on the Taiwan Stock Exchange, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of our ADSs may fluctuate in response to the fluctuation of the trading price of our common shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and trading volumes of listed securities, and there are currently limits on the range of daily price movements. In recent years, the Taiwan Stock Exchange Index reached a peak of 10,202.20 in February 2000 and subsequently fell to a low of

 

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3,446.26 in October 2001. During 2011, the Taiwan Stock Exchange Index peaked at 9,145.35 on January 28, 2011, and reached a low of 6,633.33 on December 19, 2011. On April 13, 2012, the Taiwan Stock Exchange Index closed at 7,788.27. The Taiwan Stock Exchange has experienced certain problems, including market manipulation, insider trading and payment defaults. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Taiwan companies, including our ADSs and common shares, in both the domestic and the international markets.

 

In response to declines and volatility in the securities markets in Taiwan, the Republic of China government formed the National Financial Stabilization Fund to support these markets through open market purchases of shares in Taiwan companies from time to time. The details of the transactions of the National Financial Stabilization Fund have not been made public. In addition, the government’s Labor Insurance Fund and other funds associated with the government have in the past purchased, and may from time to time purchase, shares of Taiwan companies listed on the Taiwan Stock Exchange or other markets. As a result of these activities, the market price of common shares of Taiwan companies may have been and may currently be higher than the prices that would otherwise prevail in the open market. Market intervention by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Taiwan companies, which may affect the market price and liquidity of our common shares and ADSs.

 

We may be sanctioned or lose our licenses for violations of limits on foreign ownership of our common shares, and these limits may materially and adversely affect our ability to obtain financing.

 

The laws of the Republic of China limit foreign ownership of our common shares. Prior to March 1, 2006, the Ministry of Transportation and Communications, as the competent authority under the Telecommunications Act, had the power to prescribe the limits on foreign ownership of our common shares. After the formation of the National Communications Commission on March 1, 2006, the National Communications Commission replaced the Ministry of Transportation and Communications as the competent authority under the Telecommunications Act pursuant to the NCC Organization Law. The National Communications Commission and the Ministry of Transportation and Communications reached an agreement on foreign ownership of Chunghwa Telecom. An announcement issued by the Ministry of Transportation and Communications on December 28, 2007 stipulated that direct holdings by foreign investors in Chunghwa Telecom cannot exceed 49% of our outstanding share capital and the total direct and indirect holdings by foreign investors cannot exceed 55% of our outstanding share capital. As of April 13, 2012, foreign direct holdings of our outstanding share capital is at 17.22%. If we fail to comply with the applicable foreign ownership limitations, our licenses to operate some of our businesses could be revoked. Moreover, we cannot predict the manner in which the National Communications Commission will exercise its authority over us, and the National Communications Commission could decline to raise, or determine to reduce, this foreign ownership limitation.

 

If we are deemed to be in violation of our foreign ownership limitations, any consequences arising from such violation may materially and adversely affect us. Moreover, since we are unable to control ownership of our common shares or ADSs representing our common shares, and because we have no ability to stop transfers among stockholders, or force particular stockholders to sell their shares, we may be subject to monetary fine or lose our licenses through no fault of our own. In that event, our business could be disrupted, our reputation could be damaged and the market price of our ADSs and common shares could decline. These limitations may also materially and adversely affect our ability to obtain adequate financing to fund our future capital requirements or to obtain strategic partners, and alternate forms of financing may not be available on terms favorable to us or at all.

 

Restrictions on the ability to deposit our common shares into our ADS program may adversely affect the liquidity and price of the ADSs.

 

The ability to deposit shares into our ADS program is restricted by Republic of China law, under which no person or entity, including you and us, may deposit our common shares into our ADS program unless the Securities and Futures Bureau has not objected within a prescribed period following the filing with it of an application to do so, except for the deposit of the common shares into our ADS program and for the issuance of additional ADSs in connection with:

 

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·                  distribution of share dividends or free distribution of our common shares;

 

·                  exercise of preemptive rights of ADS holders applicable to the common shares evidenced by our ADSs in the event of capital increases for cash; or

 

·                  purchases of our common shares in the domestic market in Taiwan by the investor directly or through the depositary and delivery of such shares or delivery of our common shares held by such investors to the custodian for deposit into our ADS program, subject to the following conditions: (a) the depositary may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposits only if the total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by the Securities and Futures Bureau, plus any ADSs issued pursuant to the events described above; and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled.

 

As a result of the limited ability to deposit common shares into our ADS program, the prevailing market price of our ADSs on the New York Stock Exchange may differ from the prevailing market price of the equivalent number of our common shares on the Taiwan Stock Exchange.

 

You will be more restricted in your ability to exercise voting rights than the holders of our common shares, which may diminish your influence over our corporate affairs and may reduce the value of your ADSs.

 

Holders of American depositary receipts evidencing our ADSs may exercise voting rights with respect to the common shares represented by these ADSs only in accordance with the provisions of our deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our common shares, the depositary bank will, as soon as practicable thereafter if requested by us in writing, mail to ADS holders the notice of the meeting sent by us, voting instruction forms and a statement as to the manner in which instructions may be given by the holders.

 

ADS holders will not generally be able to exercise voting rights attaching to the deposited securities on an individual basis. Under the deposit agreement, the voting rights attaching to the deposited securities must be exercised as to all matters subject to a vote of stockholders collectively in the same manner, except in the case of an election of directors and supervisors. The election of our directors and supervisors is by means of cumulative voting. In the event the depositary does not receive voting instructions from ADS holders in accordance with the deposit agreement, our chairman or his or her designee will be entitled to vote the common shares represented by the ADSs in the manner he or she deems appropriate at his or her discretion, which may not be in your interest.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

 

We may from time to time distribute rights to our stockholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer you those rights unless the distribution to ADS holders of both the rights and any related securities are either registered under the U.S. Securities Act of 1933, as amended, or the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

 

Changes in exchange controls that restrict your ability to convert proceeds received from your ownership of ADSs may have an adverse effect on the value of your investment.

 

Your ability to convert proceeds received from your ownership of ADSs depends on existing and future exchange control regulations of the Republic of China. Under the current laws of the Republic of China, an ADS

 

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holder or the depositary, without obtaining further approvals from the Central Bank of the Republic of China (Taiwan) or any other governmental authority or agency of the Republic of China, may convert NT dollars into other currencies, including U.S. dollars, in respect of:

 

·                  the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility; and

 

·                  any cash dividends or distributions received from the common shares represented by ADSs.

 

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payments for rights offerings. The depositary may be required to obtain foreign exchange approval from the Central Bank of the Republic of China (Taiwan) on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of the Republic of China (Taiwan) will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

 

Under the Republic of China Foreign Exchange Control Law, the Executive Yuan of the Republic of China may, without prior notice but subject to subsequent legislative approval rendered within ten days from such imposition, impose foreign exchange controls or other restrictions in the event of, among other things, a material change in domestic or international economic conditions which might threaten the stability of the domestic economy in Taiwan.

 

You are required to register with the Taiwan Stock Exchange and appoint several local agents in Taiwan if you withdraw common shares from our ADS facility and become our stockholder, which may make your ownership burdensome.

 

If you are a non-Republic of China person and wish to withdraw common shares represented by your ADSs from our ADS facility and hold those common shares, you are required under the current laws and regulations of the Republic of China to appoint an agent, also referred to as a tax guarantor, in the Republic of China for filing tax returns and making tax payment. A tax guarantor must meet certain qualifications set by the Ministry of Finance of the Republic of China and, upon appointment, becomes a guarantor of your Republic of China tax obligations. If you wish to repatriate profits derived from the sale of withdrawn common shares or cash dividends or interest on funds derived from the withdrawn common shares, you will be required to submit evidence of your appointment of a tax guarantor and the approval of the appointment by the Republic of China tax authorities. You may not be able to appoint and obtain approval for a tax guarantor in a timely manner.

 

In addition, under the current laws of the Republic of China, you will be required to be registered as a foreign investor with the Taiwan Stock Exchange for making investments in the Republic of China securities market prior to your withdrawal and holding of common shares represented by the ADSs. You will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage firm and a bank account to remit funds, exercise stockholders’ rights and perform other functions as holders of ADSs may designate. You must also appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Without the relevant registration and appointment of the local agent and custodian and the opening of a securities trading account and bank account, you will not be able to hold, subsequently sell or otherwise transfer our common shares withdrawn from the ADSs facilities on the Taiwan Stock Exchange.

 

Our actual financial results may differ materially from our published yearly guidance.

 

Before 2009, we voluntarily published operating results guidance for the current fiscal year prepared in accordance with R.O.C. GAAP. In 2009 and 2010, we published operating results guidance on a quarterly basis. Beginning in 2011, we reverted to publishing our operating results guidance on an annual basis again and no longer publish operating results guidance on a quarterly basis. These projections are based on a number of estimates and

 

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assumptions and are inherently subject to significant uncertainties and contingencies, including the risks factors described in this annual report. In particular, projections are forward-looking statements that are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time.

 

ITEM 4.                  INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

Our legal and commercial name is Chunghwa Telecom Co., Ltd. We were officially established on July 1, 1996 as part of the Republic of China government privatization efforts. Prior to our formation, we were operating as a business unit of the Directorate General of Telecommunications. The common shares of the Company have been listed on the Taiwan Stock Exchange under the number “2412” since October 2000 and its ADSs have been listed on the New York Stock Exchange under the symbol “CHT” since July 2003. In August 2005, we became a privatized company as the ownership of the Taiwan government was reduced to less than 50%. Today, we are the largest full telecommunication service provider in Taiwan. Our principal executive offices are located at 21-3 Hsinyi Road, Section 1, Taipei, Taiwan, Republic of China, and our telephone number is (886) 2-2344-5488. Our website address is http://www.cht.com.tw. The information on our website does not form a part of this annual report.

 

We are the largest telecommunications service provider in Taiwan and one of the largest in Asia in terms of revenues. As an integrated telecommunications service provider, our principal services include:

 

·                  domestic fixed communications services, including local and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services, MOD services, domestic data services and domestic other services;

 

·                  mobile communications services, including mobile services, sales of mobile handsets and data cards and mobile other services;

 

·                  internet  services, including HiNet, our Internet service provider, Internet value-added services, data communication services, Internet data center services, and Internet other services;

 

·                  international fixed communications services, including international long distance telephone services, international leased line services, international data services, satellite services and international other services; and

 

·                  other services, including non-telecom services.

 

In addition to these traditional telecommunication services, we also focus on selected ICT services and advanced development, such as cloud computing.

 

For each of our key services, we enjoy leading positions across a number of areas in terms of both revenues and customers:

 

·                  we are Taiwan’s largest provider of fixed communications services; we are Taiwan’s largest mobile communications service provider;

 

·                  we are Taiwan’s largest broadband access provider; and

 

·                  we are Taiwan’s largest internet service provider.

 

In 2011, our revenues under R.O.C. GAAP were NT$217.5 billion (US$7.2 billion), our consolidated net income was NT$48.1 billion (US$1.6 billion) and our basic earnings per share was NT$6.04 (US$0.20).

 

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In 2011, we made capital expenditures totaling NT$26.9 billion (US$0.9 billion), of which 62 % was related to our domestic fixed communications business, 16% was related to our mobile communications business, 14% was related to our internet business, 6% was related to our international fixed communications business and 2% was related to our other businesses. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital expenditures.

 

Competitive Strengths

 

We believe that we are well positioned to take advantage of growth opportunities in the telecommunications market in Taiwan as new technologies evolve. In particular, we have maintained our leading market share in mobile communications and internet services since the opening of the Taiwan telecommunications market to competition in 1996. Furthermore, we have enjoyed greater flexibility in making purchasing and other business decisions after we were privatized in August 2005.

 

We believe that further deregulation and market liberalization will continue to drive the growth of the overall market for telecommunications services in Taiwan, as well as the development of new products and services. We expect to benefit from additional opportunities as the telecommunications market in Taiwan continues to grow.

 

We believe that our primary competitive strengths are:

 

·                  our broad customer base in Taiwan;

 

·                  our position as an integrated, full-service telecommunications provider in Taiwan; and

 

·                  our capital resources and technology, which we believe we can build on to expand our leading position in the mobile communications and internet services markets, including through our continued construction of our existing 3G/HSPA/HSPA+ mobile network, our expansion of FTTx broadband access services, IP-based MOD services, fixed/mobile value added and cloud computing related services, and our future construction of a fourth generation long term evolution mobile network if we win the technology neutral license in 2015.

 

We have a broad customer base in Taiwan.

 

We are the largest telecommunications service provider in Taiwan with a broad customer base across all of our service offerings. Despite deregulation and an increase in competition in the Taiwanese telecommunications industry, we have maintained a market leading position in our primary service offerings of fixed communications, mobile communications and internet services. We believe our broad customer base in each of our service offerings grants us a distinct competitive advantage to maintain our existing customers and attract new customers and increases the chance of success for the launch and popularization of new products. As the telecommunications industry continues its trend of converging fixed communications, mobile communications and internet services, we believe that our comprehensive service offerings places us in a strong position to offer converged products and services to our customers.

 

We are an integrated full-service telecommunications provider in Taiwan.

 

We are the largest telecommunications service provider in Taiwan with a leading position in fixed communications services, mobile communications services and internet services.

 

Broad range of communications products and services. We believe that our ability to provide an attractive and comprehensive range of telecommunications services positions us to provide bundled and value-added services to our business and residential customers. In addition, we are able to offer innovative integrated services and tariff packages to meet the specific needs of our customers.

 

Broad network coverage. The breadth of our network and our ownership of the so called “last mile” infrastructure in Taiwan, which comprises the connection between the local telephone service provider’s switching

 

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centers to the end-users’ buildings or homes, provide us with access to existing and potential customers and creates a platform for expanding our services. As of December 31, 2011, substantially all of our installed telephone lines were capable of delivering ADSL services and network coverage of ADSL was approximately 99%. In order to provide higher bandwidth services for our customers, we are constructing our FTTx network. As of December 31, 2011, network coverage of FTTx with speed of 50 Mbps and 100 Mbps was approximately 75% and 24.6 %, respectively. In addition, our mobile communications network provides nationwide coverage. Our large cellular spectrum allocation together with our network of 17,973 base stations position us well for the continued expansion of our mobile services in Taiwan.

 

Brand awareness, distribution channels and customer service. Our principal brands “Chunghwa Telecom”, “emome” and “HiNet” have a reputation for quality and reliability. We serve our large and well-established customer base through our extensive customer service network in Taiwan, including 17 operations offices, 326 service centers, 223 exclusive service stores and 6 customer service call centers.  We also offer comprehensive and high-quality point of sale and after sale services in our service centers, stores and over the internet. Our extensive sales and distribution channels help us attract additional customers and develop new business opportunities. In 2011, we also obtained several domestic and international awards which recognized our service quality, corporate governance and corporate social responsibility. In the Reader’s Digest Trusted Brands Award, we have stood out and won the Platinum Award of Telecom Company in Taiwan for eight consecutive years since 2004. We were also awarded the Best Companies in Asia” by Euromoney, “Excellence in Corporate Social Responsibility Award” by the Common Wealth Magazine, “Excellent Service Award 2011” by Global Views, “Best Financial Disclosure” in Asia-Pacific and Greater China, and “Bronze Award of Investor Relations Website” in Taiwan by IR Global Rankings.

 

Operational expertise. Our management and employees have extensive operating experience and technical knowledge, which we believe cannot be easily replicated by competitors. We also believe we will continue to attract and retain high quality employees.

 

Comprehensive customer billing infrastructure. As Taiwan’s leading telecommunications services provider, we have extensive resources and infrastructure relating to billing services. In particular, we issue, in the aggregate, approximately 17 million invoices, including integrated bills, every month. We intend to continue taking advantage of this unique attribute by offering bill collection services to internet content providers and other entities that lack the necessary resources and infrastructure for effective customer billing.

 

We have the capital resources and technology to enhance our leading position in the growing mobile communications and internet services markets.

 

Enhancing position in our leading markets. We expect our mobile value-added service, fixed broadband value-added and information and communication technologies services to continue to be the key drivers of our future growth. With our leading market share, we enjoy substantial economies of scale in equipment procurement as well as the marketing of our products and services.

 

Strong capital structure. We believe we have greater financial resources than other telecommunications operators in Taiwan. Our relatively low debt-to-equity capital structure, together with our high levels of cash and operating cash flows, provides us with the flexibility and resources to invest in capital intensive and growing businesses. In particular, we continue to invest in broadband internet protocol networks, fiber-optic networks, and 3G/HSPA, HSPA+ mobile communications networks and services. We also have begun making investments in or acquiring other companies which provide complementary telecommunications and internet-related services to further expand our business and offer new products and services.

 

Advanced network technology. Since 2003, we have developed and upgraded our existing infrastructure for both mobile and fixed line networks. We developed a high-speed internet protocol backbone network, expanded the coverage of our ADSL network and deployed a 3G network. In 2008, we launched a long-term next generation network construction project that will upgrade our local fixed line networks to high-speed packet-based digital networks with FTTx technologies, including FTTC/N, FTTB and FTTH, in order to provide high speed internet, VoIP, MOD and high definition television, or HDTV, services. We have also upgraded our 3G network to HSPA and HSPA+. In 2011, we expanded HSPA/HSPA+ coverage to provide better mobile internet services with speeds

 

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of up to 21 Mbps. Our investment in network infrastructure places us in a position to capture a significant share of the internet and high-speed data transmission market.

 

Research and development expertise. As of March 31, 2012, we employ over 2,213 research professionals and engineers whose principal focus is to develop advanced network services and operations support systems and to build selected core technologies. In 2011, our research and development expenses accounted for 1.6% of our revenues under R.O.C. GAAP. We believe our focus on research and development will allow us to efficiently develop and deploy new technologies and services ahead of our competitors.

 

Business Strategy

 

Taiwan has one of the highest fixed line penetration rates in Asia and has also experienced rapid adoption of wireless communications and internet services, including broadband access services. We believe that telecommunications services will evolve over the coming years, driven by a number of technological innovations, including cloud computing, mobile value-added services and Internet of Things. We also believe that the convergence trend of communications technologies will provide a significant competitive advantage to integrated telecommunications service providers that are able to design and construct sophisticated and scalable networks capable of serving as a common platform for a broad range of services.

 

Our key strategic objectives are to maintain our position as a leading integrated telecommunications services provider in Taiwan and to enhance our leadership position in growing markets, such as the mobile services and internet services markets, including fixed/mobile broadband access services and value-added services.

 

Consistent with our strategic objectives, we have developed the following business strategies:

 

Focus on our core strengths while expanding our scope of services to capture new growth opportunities

 

Our core strengths are the management of telecommunication networks and the provision of services over these networks. We currently operate several networks linked by a core backbone infrastructure consisting of public switched telephone, cellular, ADSL, FTTx and internet protocol networks. Our strategy for each network differs depending on the market dynamics and future growth prospects of services delivered over these networks. In general, we endeavor to maintain our strong market position in each of our business lines and seek to expand the scope of our business beyond network services by offering value-added services to generate growth and new opportunities.

 

Fixed communications: Our strategy is to maintain our position as the market leader in domestic fixed communications. In addition to our Public Switched Telephone Network, or PSTN, we are working on NGN projects to facilitate network migration into IP Multimedia Subsystem, or IMS. The first stage of our IMS network was completed in March 2009. This is the largest ever NGN deployment that has been constructed in Taiwan, with more than 500,000 subscriber facilities. As of December 31, 2011, the IMS network capacity has been expanded to nearly one million subscribers. To enhance business efficiency and reduce operational expenditures, we constructed a new Multi-Protocol Label Switching-, or MPLS-, based IP backbone to consolidate existing IP networks in September 2008. Based on these facilities, we will collaborate with the third parties to develop new integrated services to retain our customers and generate new revenue streams. For provision of new services, we launched our multimedia value-added services in October 2010. These services include provision of home-based surveillance cameras and daily life information, entertainment and phone services.

 

Broadband services: We also plan to continue to build on the success of our broadband access services.

 

·                  We provided ADSL and FTTx services to 4.5 million customers, which represented more than 79.2% of Taiwan’s fixed line broadband customers by the end of 2011. We have successfully migrated many of our customers from low-speed to higher-speed internet access services and upgraded ADSL subscribers to FTTx, which offers an even higher speeds by using fiber optic technology. Approximately 87% of our broadband customers subscribe for downlink speeds of over 2 Mbps, and 53% were with FTTx as of December 31, 2011.

 

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·      We are continuing the build-out of our FTTx infrastructure. Because we typically realize higher average revenue per user for our FTTx internet services, we plan to continue offering various incentives for our ADSL and other internet customers to switch to our FTTx services. In 2011, FTTx revenue has reached 65.4% of our total broadband revenue.

 

Mobile Communications: We offer our mobile services via both 2G and 3G networks. For 2G, we are using standard of Global System for Mobile Communications or GSM while for 3G, wideband code division multiple access, or WCDMA is adopted. In order to meet the demand from our customers for high-speed mobile data access, we upgraded our 3G mobile service to High-Speed Packet Access, or HSPA technology on September 12, 2006 and to HSPA+ services in 2010. The prevalence of smart devices, such as smart phones and tablet PCs that utilize large amounts of mobile data, has become a challenging task for all mobile operators. We are continuing to develop Heterogeneous Network, or HetNet, to meet such demand. HetNet incorporates macrocell for large area coverage, and small cells including micro cells, pico cells, femtocells and Wi-Fi to increase our data capacity. Our strategy for mobile service includes the following initiatives:

 

·      Focusing on maintaining our average revenue per user by promoting increased use of wireless value-added services, such as our “emome” service, Java games, ring-back tone services, Hami music, Hami books, Hami Apps, and online shopping;

 

·      Encouraging our customers to use our 3G and HSPA/HSPA+ services by offering customized mobile handsets combined with attractive value-added services and product packages;

 

·      Expanding our HSPA+ coverage and enhancing the base station bandwidth up to 42 Mbps to attract more mobile internet customers;

 

·      Catering for the high bandwidth usage of smart phone and tablet PCs, we have constructed more than 20,000 Wi-Fi Hotspot in 2011 to share some of the data traffic from the mobile network. We are continuing the construction of an additional 10,000 Wi-Fi Hotspot and 100 hot zones in 2012, especially for highly commercial areas and special events, as a cost-effective technology to help offload the 3G/HSPA+ data traffic;

 

·      Converging fixed communications and mobile communications services to provide customers with access to personalized information through personal computers or mobile handsets; and

 

·      Taking advantage of our superior brand and network quality to attract our competitors’ customers.

 

Internet services: Our strategy for internet services is to continue to build on the success of our HiNet internet services and enhance our internet value-added services.

 

·      We are developing new media to provide both higher-speed access as well as attractive content to our customers. We are also continually enhancing our internet value-added services, such as online games, internet music, internet banking and internet protocol video services, including hiChannel, an internet platform where customers can view videos and multimedia content.

 

Emerging services: Our emerging services include ICT, cloud computing and convergence services. We have been providing ICT services since 2009, including Intelligent Energy Network, or iEN, and Intelligent Transporation System, or ITS, services. Our experience with ICT services positions us well to develop and offer cloud computing services, and we anticipate that cloud computing services could become an important area of growth for telecom operators in the near future. We started to offer hicloud CaaS (Compute as a Service) and provide customers 24-hour installation services in 2010.  We started to offer hicloud Mall in 2011, which allows ISV (Independent Software Vendors) to offer their application software in the hicloud Mall for saleIn 2012 we also introduced cloud-based multi-screen services providing music, media, news, weather, traffic information, personal information (Hami+ Cloud) and payment services. The integration of platform and network enables our customers to use and purchase the service through their PCs, IPTV (MOD), tablet PCs and smart phones, and cater to users’ needs to utilize value-added services

 

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anytime, anywhere with any device. We are continuing to expand the scope and variety of our convergence services to create more value for our customers.

 

Emphasize quality of service and customer satisfaction

 

Quality of service is critical in attracting and retaining customers and enhancing our long-term profitability. In order to continually enhance and improve the quality of our services, we have, in addition to the quality assurance function of our regular operating units, established a number of dedicated task forces to monitor our network performance. Our senior management sets our quality evaluation criteria and regularly reviews the quality of our performance.

 

In order to ensure that our quality of service will translate into strong customer loyalty, we plan to continue to focus on and invest in the provision of a full range of services that emphasize customer care from the point of sale onward. For example, we have extended the focus of our corporate customer services from major accounts to include small and medium-sized enterprises and in January 2007 established our Enterprise Business Group. As of December 31, 2011, our Enterprise Business Group is staffed by approximately 379 professionals and offers packaged and customized services, customer-oriented solutions and integrated information and communications services. We have completed the integration of our call centers, all of which can now be reached by calling a single number “123.” We offer 24-hour customer service, including the handling of service and billing inquiries with the assistance of an Interactive Voice Response, or IVR, system. To improve the quality of our customer services, we implemented a customer relationship management system, which encompass, among other things, a customer complaint system, a business information database for the use of our call centers, and a data mining system to enhance our sales and market analysis efforts.

 

Improve operational efficiency and cost structure

 

We have historically been focused, and will continue to focus, on cost control, particularly in the areas of network efficiencies and personnel costs. We expect to be able to further improve our operational efficiency and cost structure by migrating to more advanced networks and sophisticated operational support systems, and efficiently managing our workforce.

 

Capital expenditures. Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. We have commenced a project for gradually upgrading our entire public switched telephone network to a next-generation network. Next-generation internet protocol switches will have substantially more capacity and greater upgrade flexibility and should result in savings from a reduced number of switching centers and a reduction in related property, materials and personnel costs. We have also devoted resources toward the expansion of our 3G mobile network and the continuing build-out of our FTTx infrastructure.

 

Personnel costs. We seek to improve our operational efficiency by reducing our personnel costs. For example, we offered voluntary retirement programs once each year since 2005, which resulted in reductions of 5,696 employees. We also hired more than 3,565 new employees after our privatization in August 2005. Since then, we continued to align our organizational structure by integrating various operating units and departments. We will also continue to reallocate our personnel from traditional fixed line services to our growing businesses and to our marketing and customer services departments, as well as exploring outsourcing opportunities where we deem appropriate.

 

Expand our business through alliances, acquisitions and investments

 

We plan to expand our business in high-growth areas, such as interactive multimedia broadband services, content delivery services and value-added services, through alliances, acquisitions and investments. We believe that our experience, operational scale and large customer base make us an attractive ally for other service providers.

 

Alliances. We have formed and will continue to pursue alliances with information content providers, multimedia service platform providers, customer premises equipment providers, internet portal operators,

 

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information and communication technology solutions partners to diversify our business operations and enhance our service offerings. As of the date of this annual report, we have collaborated with more than 600 information content providers, more than 130 customer premises equipment providers, more than 14 internet service providers, more than four internet portal operator and more than 90 information and communication technology solution partners. In 2010, we signed MOUs with some international companies such as Trend Micro, Intel Corporation, Quanta Computer, Sky Cloud Technology and Inventec Corporation to cooperate on ICT and cloud computing businesses. We believe that our experience in running internet data centers and our ability to serve retail customers coupled with the technologies offered by these partners will position us advantageously in this new area. In February 2011, we signed an MOU with HTC to form a strategic partnership to work on customized handsets and share marketing resources. In February 2012, we subscribed for shares of China Airlines in an equity offering and signed an MOU with the airline to form a strategic alliance; please refer to “—Acquisitions and Investments” for further information.

 

Acquisitions and Investments. We have focused our acquisition strategy on making acquisitions of companies that we believe to be complementary to our long-term strategic goals. In addition, after our privatization, we have focused our investment strategy on the development of new businesses and the enhancement of our operation efficiency. Recently we have entered into the following notable transactions:

 

To further our expansion into the international telecommunications market overseas, we established two wholly owned subsidiaries, Chunghwa Telecom Singapore Pte., Ltd. and Chunghwa Telecom Japan Co., Ltd., in July and September 2008, respectively. The core businesses of these subsidiaries include data wholesale, IP transiting services, international private leased circuit, or IPLC, IP VPN and voice wholesale. Both companies have successfully obtained all the necessary and relevant local telecommunication licenses and permits to operate. Through these subsidiaries, we hope to strengthen our overseas sales channels, generate sales from Taiwanese and other multinational corporations, increase international incoming voice traffic and IP transiting services and increase our overseas revenues.

 

In September 2008, to reinforce our satellite capabilities by replacing the ST-1 telecommunications satellite, we established ST-2 Satellite Ventures Pte., Ltd. in Singapore with our partner SingTelSat Pte., Ltd. Our ownership in ST-2 Satellite Ventures Pte., Ltd. is 38%.

 

In January 2009, we became a 49% stockholder in InfoExplorer Co., Ltd., a company whose core businesses include IT solution provision, IT application consultation, system integration and package solution. The combination of InfoExplorer’s IT expertise with our communication technology capabilities will boost our information and communication technology profile. The stockholders of InfoExplorer Co., Ltd., at the special meeting of stockholders held on February 25, 2011, approved the merger with International Integrated System Inc. and e-ToYou International, Inc. in accordance with the Business Mergers and Acquisitions Act. Upon the merger on April 1, 2011, InfoExplorer Co., Ltd. became the surviving company and International Integrated System, Inc, or IISI. and e-ToYou International, Inc. were dissolved. The name of the surviving company is “International Integrated System, Inc.” and our shareholding is 33.47%.  After the stockholders’ meeting of IISI held on June 24, 2011, we lost control of the board of directors, and IISI was deconsolidated and going forward the investment is accounted for as an equity method investment.

 

In April 2009, we acquired a 30% equity interest in So-net Entertainment Taiwan Limited, or So-net, the fourth largest ISP in Taiwan. We acquired the equity interest in So-net to transform So-net into one of our sub-brands in order to compete against other cable internet service providers.

 

In September 2009, we increased our stake in Chunghwa Investment from 49% to 89% and became the parent company of Chunghwa Investment.

 

In 2010, we acquired a 6.67% equity interest in Innovation Works Limited, or IW. Our shareholding decreased to 1.93% in 2011 due to issuance of employee options. In June 2010, we invested 13.3% in Innovation Works Development Fund, or IWDF, which was established to support the development of Innovation Works Limited. After IWDF’s US$180 million capital increase in 2011, our shareholding in IWDF decreased to 4.4%. We believe our investment in IW and IWDF, which mainly conduct or invests in mobile internet industry in mainland China, will help open up our business opportunities in e-commerce, mobile internet and cloud computing services in the mainland.

 

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In June 2010, we became a 18.2% stockholder of CQi Energy Infocom Inc., or CQi, which engages mainly in intelligent energy network management services.

 

In September 2010, we established Chunghwa Precision Test Tech. USA Corporation, that engages in the testing service of semi-conductor components and printed circuit boards.

 

In March 2011, we established a wholly owned subsidiary Chunghwa Telecom (China) Co., Ltd., which engages mainly in providing services of planning, design, and intergration of information systems.

 

In May 2011, we established a wholly owned subsidiary Chunghwa Telecom Vietnam Co., Ltd. in Vietnam, which engages mainly in providing International Private Leased Circuit, or IPLC, and Intelligent Energy Network, or iEN, services to Taiwanese enterprises in Vietnam.

 

In May 2011, we, together with President Chain Store Corporation and EasyCard Corporation established Dian Zuan Integrating Marketing Co., Ltd., or DZIM. As of December 31, 2011, we owned 40% of DZIM.  DZIM engages mainly in information technology services and general advertising services.

 

In July 2011, we established Chunghwa Sochamp Technology Inc., which mainly engages in license plate recognition systems.  As of December 31, 2011, we owned 51% of Chunghwa Sochamp Technology Inc.

 

In August 2011, we and United Daily News established a joint venture, Smartfun Digital Co., Ltd., which mainly engages in sales of educational software and providing digital parenting education.  As of December 31, 2011, we owned 65% of Smartfun Digital Co., Ltd.

 

In September 2011, we invested in Huada Digital Corporation and owned 50% of this company as of December 31, 2011.  Huada Digital Corporation mainly engages in providing software services.

 

In February 2012, we subscribed for shares of China Airlines in an equity offering and became a 5.1% stockholder of China Airlines Ltd. We expect to leverage the airline’s expertise and operational experience within the tourism and transportation industries to develop relevant Information and Communications Technology services, including intelligent tourism and transportation cloud services. We plan to develop and offer cloud-based tourism services to address the needs of the tourism industry, and we expect China Airlines Ltd. to facilitate the development and penetration of our cloud-based tourism service by introducing our service to potential users.

 

Please also see notes 1 and 13 to our consolidated financial statements included elsewhere in this annual report for our current strategic investments.

 

Going forward, we may consider making other equity investments and acquisitions that we believe are complementary to our business and strategic goals. Our future investment will be aimed at expanding our business scale and scope, making better use of our research and development resources and operational experience and increasing our revenues through investing in core telecom businesses as well as value-added services. We expect to target the markets of our overseas investments from Southeast Asia to China while carefully evaluating the risks involved.

 

Maintain focus on maximizing stockholder value

 

We are committed to maximizing stockholder value and intend to maintain our high dividend payout policy. Following our privatization, we have more flexibility to implement capital management initiatives, including possible repurchases of our outstanding common shares and increases in our leverage through debt financing. We bought back 121,075,000 shares between August 29, 2007 and October 25, 2007 and cancelled those shares on December 29, 2007 and February 21, 2008, respectively.

 

We continued our capital reduction plan from 2007 to 2010. We effected the last capital reduction plan in 2010 by reducing 20% capital stock in the amount of NT$19.4 billion. The cash payment of NT$19.4 billion was made on January 25, 2011 to our stockholders.

 

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B. Business Overview

 

Our Principal Lines of Business

 

Our core business segments are our domestic fixed communications business, mobile communications business, internet business and international fixed communications business.

 

Domestic Fixed Communications Business

 

The provision of domestic fixed communications services is one of our principal business activities. Our domestic fixed communications business includes local and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services, multimedia on demand services, and domestic other services. We are the largest provider of local and domestic long distance telephone services in Taiwan. We also provide interconnection with our fixed line network to other mobile and fixed line operators. Since June 2001, three new operators have begun offering fixed line services. Our revenues from domestic fixed communications services were NT$71.5 billion or 36.0% of our revenues in 2009, NT$70.7 billion, or 34.9% of our revenues in 2010 and NT$79.4 billion, or 36.5% of our revenues, in 2011. In general, we expect that revenues from our domestic fixed communications business as a percentage of our total revenues will continue to decline primarily due to the expansion of our mobile communications services and the general trend of a continued decline in fixed line voice traffic. In 2011, however, our domestic fixed communications business increased as a percentage of our total revenues due to the change in pricing and collections policies for fixed line-to-mobile phone calls.  Since January 1, 2011, the fixed line operator now sets and collects the tariffs for fixed line-to-mobile phone calls, whereas prior to January 1, 2011, these functions were performed by the mobile operator. Please see “Item 4. Information on the CompanyB. Business Overview—RegulationInterconnection Arrangements”.

 

Local Telephone

 

The following table sets forth our revenues from local telephone services for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions)

 

(in millions)

 

Local telephone revenues:

 

 

 

 

 

 

 

 

 

Usage

 

10.6

 

10.0

 

21.0

 

693.0

 

Subscription

 

17.2

 

17.0

 

16.7

 

552.2

 

Interconnection

 

2.5

 

2.4

 

1.4

 

43.8

 

Pay telephone

 

0.6

 

0.5

 

0.4

 

14.6

 

Other

 

2.3

 

2.9

 

2.2

 

88.5

 

Total

 

33.2

 

32.3

 

41.7

 

1,392.1

 

 

We provide local telephone services to approximately 12.08 million customers in Taiwan. Our fixed line network reaches virtually all homes and businesses in Taiwan. Revenues from local telephone services comprised 16.7%, 15.9% and 19.2% of our total revenues in 2009, 2010 and 2011, respectively. Approximately 74.1 % of our local telephone customers as of December 31, 2011 were residential customers. We are currently the leader of the local telephone service market, with an average market share of approximately 97.1%, 96.9% and 95.3% in 2009, 2010 and 2011, respectively.

 

The following table sets forth information with respect to our local telephone customers and penetration rates as of the dates indicated.

 

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As of December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

(in thousands, except percentages
and per household data)

 

Taiwan population(1)

 

23,120

 

23,162

 

23,225

 

Fixed line customers:

 

 

 

 

 

 

 

Residential

 

9,328

 

9,165

 

8,948

 

Business

 

3,120

 

3,142

 

3,133

 

Total

 

12,448

 

12,307

 

12,081

 

Growth rate (compared to the same period in the prior year)

 

(2.2

)%

(1.1

)%

(1.8

)%

Penetration rate (as a percentage of the population)

 

53.8

%

53.1

%

52.0

%

Lines in service per household

 

1.19

 

1.15

 

1.11

 

 


(1)   Data from the Department of Population, Ministry of the Interior, Republic of China.

 

Demand for local customer lines has historically been driven by population growth. However, with the development of mobile technologies, this trend has been declining. The number of fixed line customers decreased by 1.1% in 2010 compared to 2009 due to customers replacing fixed lines with mobile services and also as a result of the adverse economic conditions. The number of fixed line customers decreased by 1.8% in 2011 compared to 2010. We attribute the decrease in fixed line customers to a general industry-wide trend of migrating from fixed line services to mobile and internet telephony services. In adherence to a ruling by Supreme Administrative Court, starting from September 2011, we no longer require our ADSL service subscribers to apply for our fixed line services. We also allow our existing ADSL subscribers to unsubscribe their fixed line service. The foregoing factors also caused the decrease in our fixed line customers.

 

The following table sets forth information with respect to local telephone usage for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

(in millions, except percentages)

 

Minutes from local calls(1)(2)

 

14,602

 

13,671

 

15,569

 

Growth rate (compared to the same period in the prior year)

 

(8.0

)%

(6.4

)%

13.9

%

 


(1)   Includes minutes from local calls made on pay telephones. It also includes minutes from fixed line-to-mobile calls due to the change in policy starting from 2011.

(2)   Calls to our HiNet internet service, which are recorded as part of our internet services, are not included in our local call minutes or revenues.

 

Minutes from local calls increased in 2011 due to the inclusion of minutes from fixed line-to-mobile calls in this category starting from 2011 as a result of the NCC’s change in policy for collecting the tariffs of fixed-to-mobile phone calls by our fixed communications business.

 

We charge our local telephone service customers a monthly fee and a usage fee. We also charge separate fees for some value-added services. The monthly fees for our primary tariff plans are NT$70 with a deductible on usage fees of NT$25 for residential customers and NT$295 for business customers. Our primary peak time usage fee is NT$1.6 for three minutes or NT$2.7 for ten minutes, depending on the tariff plan selected by the customer, and our off-peak usage fee is NT$1.0 for ten minutes. Our usage fees are the same for residential and business customers.

 

The following table sets forth information with respect to the average local telephone usage charge per minute for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

Average local telephone usage fee (per minute)

 

0.74

 

0.74

 

1.36

 

Growth rate (compared to the same period in the prior year)

 

0.4

%

0.5

%

83.8

%

 

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Average per minute usage charges remained flat at around NT$0.74 per minute in 2009 and 2010, and around NT$1.36 per minute in 2011. The increase in average per minute usage charges in 2011 was mainly due to the change in policy for collecting the tariffs of fixed-to-mobile calls from mobile service providers to fixed communications service providers since January 1, 2011, which granted our fixed communications business the right to set and collect the tariffs for fixed line-to-mobile phone calls. Part of our competitive strategy is to offer customers innovative products and services intended to both secure customer loyalty and enhance revenues. In particular, our value-added services are designed to increase our call revenues by increasing the number of calls our customers make and by receiving fees for usage of the value-added services. These services include call waiting, caller identification, call forwarding, three-party calls, ring back tone and voicemail.

 

Domestic Long Distance Telephone

 

We provide domestic long distance telephone services in Taiwan. Total revenues from domestic long distance telephone services comprised 3.7%, 3.3% and 2.7% of our revenues in 2009, 2010 and 2011, respectively. Our average market share in the domestic long distance market was approximately 82.9%, 76.1% and 74.1% in 2009, 2010 and 2011, respectively.

 

The following table sets forth information with respect to usage of our domestic long distance telephone services for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

(in millions, except percentages)

 

Domestic long distance telephone service usage (minutes)

 

3,649

 

3,415

 

3,202

 

Growth rate (compared to the same period in the prior year)

 

(8.8

)%

(6.4

)%

(6.2

)%

 

Minutes of use for domestic long distance calls have been declining as a result of traffic migration to mobile services, competition from other fixed line operators and increased use of VoIP. We expect declines in minutes of use for fixed line services to continue in the future for the same reasons.

 

The following table sets forth information with respect to the average domestic long distance telephone usage charge per minute for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

Average domestic long distance telephone usage fee (per minute)

 

NT$

 1.68

 

NT$

 1.61

 

NT$

 1.53

 

Growth rate (compared to the same period in the prior year)

 

0.3

%

(4.2

)%

(5.0

)%

 

All domestic long distance calls, regardless of the distance between the calling parties, have the same tariff. We changed the unit of billing from a per-minute basis to a per-second basis effective February 1, 1999. In addition, we reduced our peak hour domestic long distance rate in April 2001 from NT$0.045 per second to our current rate of NT$0.033 per second. Our current domestic long distance rate for off-peak hours is NT$0.0235 per second. The rates for both peak hours and off-peak hours are the same for residential and business customers. The unit price of domestic long distance calls decreased by 4.2% from 2009 to 2010 because of the resolution of mandatory tariff reduction passed by the National Communications Commission. Our average domestic long distance usage charge per minute decreased 5.0% in 2011 due to a mandatory tariff reduction. For more details of the NCC mandated tariff reduction, please see “Item 5. Operating and Financial Review and Prospects—Overview—Tariff Adjustments”.

 

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We provide so-called “intelligent” network services over our domestic long distance network, including toll-free calling, personal number, televoting, premium rate service and VPNs. We also focus on offering our customers an increasing number of value-added services and flexible tariff packages.

 

Broadband (ADSL+ and FTTx) Access

 

We provide broadband internet access through connections based on ADSL and our FTTx technology. FTTx generally offers a faster access medium for our internet customers compared to ADSL by using fiber optic technology. We are continuing the build-out of our FTTx infrastructure. The majority of our FTTx deployments consist of fiber-to-the-node with some fiber-to-the-building deployments. The majority of the local loops still use copper wires, and we do not have any present plans to upgrade the local loops to fiber optic lines. Because we typically realize higher average revenue per user for our FTTx internet services, we are offering various incentives for our ADSL and other internet customers to switch to our FTTx services.

 

We provide broadband access services to other internet service providers that do not have their own network infrastructure, and as a result, our broadband customers also include some customers that use us only for the broadband data access line and choose another provider for ISP services. We began providing our ADSL service in August 1999 and had approximately 2.1 million customers as of December 31, 2011. Our ADSL service allows for transmission of data at high access rates and offers high-speed broadband internet access services. As of December 31, 2011, approximately 74.2%, or 1.6 million, of our ADSL customers were also our HiNet subscribers. As a result of increased migration to our higher-bandwidth FTTx services, the number of our ADSL customers declined in 2010 and 2011.

 

The following table sets forth our revenues from our broadband access services for the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

 

 

(in billions)

 

Broadband access revenues:

 

 

 

 

 

 

 

Broadband access (ADSL and FTTx)

 

19.9

 

20.3

 

20.4

 

 

We provide FTTx internet services, with downlink speeds of 10, 20, 50 and 100 Mbps, in 2011. The number of our FTTx customers increased significantly in 2009, 2010 and 2011 as prices became more affordable, coverage areas expanded and customer demand for higher bandwidth heightened. Many of new FTTx customers have migrated from using our ADSL internet services. We also provide FTTx access services to other internet service providers that do not have their own network infrastructure, and as a result, our FTTx customers also include some customers that only use us for the FTTx data access line and choose another ISP to provide internet services. Of the approximately 2.40 million FTTx customers as of December 31, 2011, approximately 2.13 million were also our HiNet subscribers. We currently offer various promotional packages to encourage more migration of our ADSL subscribers to our FTTx service. As of December 31, 2011, 51.0% of HiNet subscribers accessed the internet through our FTTx service, and we expect this ratio to increase in the future as a result of these promotional measures.

 

Our market share of Taiwan’s broadband market was approximately 83.0%, 80.5% and 79.2% in 2009, 2010 and 2011, respectively.

 

The following table sets forth our broadband service customers as of each of the dates indicated.

 

 

 

As of December 31,

 

 

 

2009

 

2010

 

2011

 

ADSL service customers (in thousands)

 

2,666

 

2,329

 

2,101

 

FTTx service customers (in thousands)

 

1,638

 

2,045

 

2,398

 

Average downlink speed (Mbps)

 

5.1

 

6.1

 

11.2

 

 

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Our ADSL service offers downlink speeds that range from 1 Mbps to 8 Mbps and uplink speeds that range from 64 kilobits per second to 640 Kbps. Our FTTx service offers downlink speeds of 10, 20, 50 and 100 Mbps matched with uplink speeds of 3, 4, 5 and 10 Mbps, respectively. As of December 31, 2011, approximately 87% of our customers had subscribed for downlink speeds of over 2 Mbps, and our average downlink speed was 11.2 Mbps.

 

We have experienced competition in the ADSL and FTTx service market from other fixed line operators and cable operators. Our strategy is to continue the migration of ADSL subscribers to FTTx so as to increase the average revenue per user. In addition, in order to strengthen customer loyalty, we have provided free speed upgrades for ADSL customers who were using lower speed services since August 2010. In June 2011, we further reduced our broadband tariff, especially for higher speed services such as 20 Mbps and 50 Mbps, in order to speed up the migration to fiber solutions and facilitate the take-up of relevant applications.  Although the lower broadband tariff had a temporary impact on our revenue, we believe the speed upgrade will have a positive effect on our promotion of broadband value-added services in the long run.

 

Charges for our HiNet dial-up service include a monthly fee entitling the customer to a fixed number of minutes of service, with an additional charge per minute when the fixed number of minutes is exceeded. Alternatively, we offer our customers an unlimited number of minutes for a fixed monthly fee. Charges for our ADSL and FTTx services include one-time installation charges and monthly subscription fees. These charges for our ADSL and FTTX services vary based on connection speed.

 

The following table sets forth our average revenue per user for each of the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

Average revenue per user for HiNet dial-up services per month(1)

 

24

 

17

 

16

 

Average revenue per user for ADSL services per month(2)

 

638

 

598

 

569

 

Average revenue per user for FTTx services per month(3)

 

1,022

 

1,019

 

945

 

 


(1)   Average revenue per user for HiNet dial-up services per month is calculated by dividing the sum of local telephone usage revenues generated by HiNet dial-up subscribers and internet access revenues by the average of the number of our HiNet dial-up subscribers on the first and last days of the period and dividing the result by the number of months in the relevant period.

(2)   Average revenue per user for ADSL service services per month is calculated as the sum of (a) ADSL access revenues for the relevant period divided by the average of the number of our ADSL customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet ADSL service revenues divided by the average of the number of HiNet ADSL subscribers on the first and last days of the period divided by the number of months in the relevant period.

(3)   Average revenue per user for FTTx service services per month is calculated as the sum of (a) FTTx access revenues for the relevant period divided by the average of the number of our FTTx service customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet FTTx internet service provider revenues divided by the average of the number of HiNet FTTx subscribers on the first and last days of the period divided by the number of months in the relevant period.

 

The decline of our ADSL average revenue per user over the last three years was due to the National Communications Commission mandated tariff reduction and the decline of FTTx average revenue per user was due to the promotional packages and discounts provided for existing customers. However, we expect our average revenue per user for broadband services to remain stable going forward as many customers will continue to migrate towards more expensive and higher speed FTTx services which will offset the declining average revenue per user of ADSL and FTTx themselves. For more details of the National Communications Commission mandated tariff reduction, please see “Item 5. Operating and Financial Review and Prospects—Overview—Tariff Adjustments”.

 

Leased Line Services—Local and Domestic Long Distance

 

We are the leading provider of domestic leased line services in Taiwan. Leased line services involve offering exclusive lines that allow point-to-point connection for voice and data traffic. Leased lines are used by

 

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business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

 

We provide data transmission services to major corporate customers in Taiwan. We also provide leased lines to other mobile and fixed line service operators for interconnection with our fixed line network and for connection within their networks.

 

The following table shows the bandwidth of local and domestic long distance lines leased to third parties as of each of the dates indicated.

 

 

 

As of December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

(in gigabits per second, or Gbps)

 

Total bandwidth

 

1,069.4

 

1,486.4

 

1,705.7

 

 

Rental fees for local leased lines are generally based on transmission speed while domestic long distance leased line rental fees are generally based on transmission speed and distance.

 

We continue to experience a decline in rental fees for all of our leased line products. The decline in rental fees since 2000 has been substantial partly as a result of broadband services substitution and other service providers constructing their own lines. In response, we continue to implement marketing and service campaigns to retain our high-value corporate customers.

 

Wi-Fi Services

 

We launched our wireless local area network service in May 2002. As of December 31, 2011, we had a total of approximately 657,007 residential and business customers that lease our access points. In addition, we have established 21,216 hot spots in public areas, such as convenience stores, airports and international convention centers, where individuals can access our wireless local area network.

 

Multimedia on Demand Services

 

We launched our multimedia-on-demand, or MOD, service in Taipei County and Keelung City in March 2004.  We have expanded this service to all 18 counties and cities of Taiwan in December 2007. Using video streaming technology through a set top box that connects to our FTTx and ADSL data connections, our customers can access TV programs, VOD and other services. We had over 133 broadcasting channels and over 12,000 hours worth of on-demand programs and served approximately 1.05 million customers as of December 31, 2011. In addition, our video-on-demand service provides movies, dramas, animations, documentaries, e-learning and music programs for home entertainment. Also, we currently offer 43 high definition, or HD, channels and other HD video-on-demand programming, such as sports, movies and knowledge materials. We offered “family package” channels in 2010 to enhance our service content and satisfy our customers’ needs. MOD revenues accounted for NT$0.9 billion, NT$1.1 billion and NT$1.4 billion (US$47.4 million) in 2009, 2010 and 2011, respectively.

 

Domestic Other Services

 

Our domestic other services include information and communication technology services, corporate solution and bill handling services.

 

Mobile Communications Business

 

Mobile communications services are one of our principal business activities. Our mobile communications services include mobile services, sales of mobile handsets and data cards and mobile other services.

 

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Mobile Services

 

We are Taiwan’s largest provider of mobile services in terms of both revenues and customers. In 2009, we generated revenues of NT$71.4 billion, or 35.9% of our total revenues, from mobile services. In 2010, we generated revenues of NT$73.1 billion, or 36.1% of our total revenues, from mobile services. In 2011, we generated revenues of NT$70.9 billion (US$2.3 billion), or 32.6% of our total revenues, from mobile services. The decrease of mobile services revenues in 2011 was primarily due to the NCC’s change in policy for collecting the tariffs for fixed-to-mobile calls from mobile service providers to fixed communications service providers since January 1, 2011.  As a result, our fixed communications business now has the right to set and collect the tariffs for fixed line-to-mobile phone calls. However, the interconnection and transition fees paid by our fixed communication business and received by our mobile segment deems as internal revenue and not recognized as external revenue of our mobile segment, while the aforementioned fees received by the alternative mobile operators were recognized as external revenue.

 

 

 

Year ended December 31,

 

 

 

2009

 

2010

 

2011

 

 

 

NT$

 

NT$

 

NT$

 

US$

 

 

 

(in billions)

 

(in millions)

 

Mobile services revenues:

 

 

 

 

 

 

 

 

 

Usage(1)

 

54.4

 

53.0

 

45.6

 

1,505.5

 

Interconnection

 

7.0

 

7.2

 

7.5

 

249.1

 

Mobile data

 

8.4

 

11.1

 

15.2

 

502.9

 

Other

 

1.6

 

1.8

 

2.6

 

84.6

 

Total mobile services

 

71.4

 

73.1

 

70.9

 

2,342.1

 

 


(1)   Includes monthly fees.

 

As the market for mobile services has continued to expand, we have experienced growth in our mobile customer base. We are the largest mobile operator in Taiwan in terms of revenues and number of customers. We had 10.07 million mobile customers, for a market share of approximately 34.9% of total mobile customers and approximately 32.6% of total mobile services revenues in Taiwan, as of December 31, 2011.

 

We offer digital mobile service through our dual band GSM network. We are one of the three national licensed providers of GSM services. We have been allocated 15 MHz in the 900 MHz frequency band and 11.25 MHz in the 1800 MHz frequency band for GSM services and general packet-switched radio services, or GPRS, and 15 MHz paired spectrum plus 5 MHz unpaired spectrum in the 2 GHz frequency band for 3G mobile services. This is the largest frequency spectrum allocation to any mobile operator in Taiwan. In February 2002, the Ministry of Transportation and Communications granted 3G mobile services concessions to five companies, including us. In March 2002, we paid NT$10.2 billion to the government for our concession. Our 3G mobile services license is valid until December 31, 2018. In July 2005, we launched our 3G mobile services using WCDMA technology. We also offer the largest international roaming network among Taiwan mobile service providers. In particular, our 2G customers have access to 366 networks in 188 countries through our GSM service roaming network and 277 networks in 134 countries through our GPRS roaming network. In addition, our 3G service system includes 158 networks in 75 countries.

 

As of December 31, 2011, we had 17,973 cellular base stations (including both GSM base stations and 3G cellular base stations) covering substantially all of Taiwan’s population. We use these base stations to support both our GSM network and 3G networks. In 2011, we upgraded more than 8,113 3G cellular base stations with HSDPA capacity and 2,444 GSM base stations with EDGE capacity in the larger metropolises of Taiwan. We will continue this process of implementing HSDPA and EDGE upgrades in the major areas of Taiwan.

 

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The following table sets forth information regarding our mobile service operations and our mobile customer base for the periods indicated.

 

 

 

As of or for the year ended December 31,

 

 

 

2009

 

2010

 

2011

 

Taiwan population (in thousands)(1)

 

23,120

 

23,162

 

23,225

 

Total mobile customers in Taiwan (in thousands)(2)

 

26,959

 

27,840

 

28,862

 

Penetration (as a percentage of the population)(2)

 

116.6

%

120.2

%

124.3

%

Total mobile revenues in Taiwan (in billions)(3)

 

NT$

215.2

 

NT$

213.2

 

NT$

217.0

 

Number of our mobile customers (in thousands)(2)(4)

 

9,269

 

9,679

 

10,072

 

Our market share by customers

 

34.4

%

34.8

%

34.9

%

Our market share by revenues

 

33.1

%

34.2

%

32.6

%

Number of our prepaid customers (in thousands)(4)

 

839

 

945

 

1,052

 

Our prepaid customers as a percentage of our total customers

 

9.0

%

9.8

%

10.4

%

Annualized churn rate(5)

 

11.21

%

10.35

%

11.52

%

Minutes of usage (in millions of minutes)

 

 

 

 

 

 

 

Incoming

 

10,500

 

11,063

 

11,368

 

Outgoing

 

9,702

 

10,190

 

10,897

 

Average minutes of usage per user per month(2)(6)

 

185

 

187

 

188

 

Average revenue per user per month(2)(7)

 

NT$

653

 

NT$

643

 

NT$

598

 

 


(1)   Data from the Department of Population, Ministry of the Interior, Republic of China

(2)   The number of mobile customers is based on the number of subscriber identification module, or SIM, cards. Since 2006, the total number of mobile customers in Taiwan included personal handy-phone system, PHS and 3G customers.

(3)   Data from the statistical monthly release by the National Communications Commission in the Republic of China, which include mobile revenues 2G, 3G and PHS.

(4)   Includes GSM, GPRS and 3G services.

(5)   Measures the rate of customer disconnections from mobile service, determined by dividing (a) our aggregate voluntary and involuntary deactivations (excluding deactivations due to customers switching from one of our mobile services to another) during the relevant period by (b) the average number of customers during the period (calculated by averaging the number of customers at the beginning of the period and the end of the period), and multiplying the result by the fraction where (c) the numerator is 12 and (d) the denominator is the number of months in that period.

(6)   Average minutes of usage per user per month is calculated by dividing the total minutes of usage during the period by the average of the number of our mobile customers on the first and last days of the period and dividing the result by the number of months in the relevant period.

(7)   Average revenue per user per month is calculated by dividing our aggregate mobile services revenues during the relevant period by the average of the number of our mobile customers on the first and last days of the period and dividing the result by the number of months in the relevant period.

 

Total mobile customers in Taiwan have reached approximately 29 million as of December 31, 2011. Mobile penetration was approximately 124.3% on the same date. The overall mobile services market experienced a slight increase of 1.8% in revenues in 2011 mainly due to the growth in mobile data service as a result of our smart phone promotions.

 

We began offering prepaid card services in October 2000 and prepaid 3G card services in February 2008. As of December 31, 2011, we had approximately 1.1 million prepaid customers representing approximately 10.4% of our total mobile customers. Prepaid customers do not pay monthly fees but pay a higher usage charge on a per second basis. Once the prepayment has been fully utilized, a prepaid customer can make additional prepayments to continue the service. Alternatively, the customer may convert to become a post-paid customer while retaining the same telephone number.

 

We offer incentives, such as mobile handset subsidies, when new customers agree to sign a service contract with us or when existing customers renew their contracts with us ranging from 12 months to 30 months. We generally offer subsidies on mobile handsets equipped with more advanced data functions to promote the expansion of our 3G mobile services. Smart phones accounted for 48% of the total handsets we offered in 2011, and we expect that the percentage to reach more than 70% in 2012. We expect our average subsidy per handset in 2012 will be less than that in 2011.

 

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While pricing has declined, the number of post-paid customers has increased which had a positive impact on traffic volume. We have also experienced a significant increase in the mobile internet service. The average minutes of usage per customer slightly increased in both 2010 and 2011 since the economy in Taiwan started to improve in 2010.

 

Our tariffs for post-paid mobile customers primarily consist of usage fees and monthly fees. When our customers are outside Taiwan, they pay roaming charges plus international long distance charges and, where applicable, local charges in roaming destinations. We negotiated with Vodafone, the largest telecommunications service provider in Europe, in November 2009 to join their global telecommunications alliance. As a result, we began offering our customers discounts on their roaming charges starting December 1, 2009. However, we expect our strategic alliance with Vodafone to be terminated in April 2013 after our current ag