Chunghwa Telecom seeks bids for ADR

The long-awaited RFP to lead Taiwan''s Chunghwa Telecom to the international equity markets was sent out yesterday (Thursday).

Submissions to lead what is expected to be a $4 billion ADR offering are due by August 28, with the sale shaping up to become one of Asia's most sought after mandates. As the world's 15th largest telecommunications company in terms of fixed line subscribers, Chunghwa will also rank as one of Asia's largest privatisations.

The deal itself is scheduled to reach the market during the first quarter of 2001 and will not only mark the culmination of stage one in the government's ambitious privatisation schedule, but should also establish a key benchmark for Taiwan's telecommunications sector. A growing pipeline of domestic operators are now lining up behind it, with, for example, Taiwan Cellular Corp (TCC) and Far EasTone both hoping to secure dual local and international listings by the end of the first quarter of 2001 as well. Further down the line, Chungwha has also indicated that it may separately spin-off its mobile and internet divisions (HiNet).

Specialists comment that although the field remains wide open, Morgan Stanley Dean Witter is perceived as having a slight edge over other US bulge bracket firms because it is not currently conflicted with other jumbo telecommunications offerings from the region.

Goldman Sachs and Merrill Lynch, for example, are both strongly rumoured to have secured the mandate to bring a massive dual equity and debt offering for China Mobile before the end of the year. Covenants restricting the Chinese company's use of debt, also means that what is said to be a $35.9 billion acquisition of seven new provincial networks, should primarily be financed through the equity markets.

So too, Salomon Smith Barney is already being talked of as one of strongest contenders to lead a $1 billion plus ADR for TCC since Citigroup has a strategic alliance with company shareholder Fubon Insurance.  

Chunghwa timetable

The first stage of Chunghwa's privatisation process will take place between August 16 and 18 when the government auctions a 3% stake to domestic institutions. Some 289.43 million shares will be divested by averaging bids that have been set a minimum floor price of NT$104 ($3.34) per share.

Results will be announced on August 25, to be shortly followed by the sale of a 13% stake to retail investors. This will be subject to a price cap of 1.3 times the institutional floor price (NT$135.2).

At its minimum floor price, the company's 9.64 billion share equity base has been valued at NT1.002 trillion ($32.18 billion), potentially making Chunghwa the third largest listed company in the Island Republic behind Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corp (UMC). Stage one of its privatisation will see the sale of a 33% stake, of which 12% will be sold via an ADR. Stage two which is scheduled to be completed next year as well, will result in the divestment of a further 33%. 

Shares already fully valued

At these price levels, analysts argue that Chunghwa Telecom is relatively fully priced, leaving only a little potential for upside during secondary trading.

"According to our estimates, Chunghwa has a DCF (discounted cash flow) price of NT$92," says one Taipei-based analyst. "It will also have a price/earnings ratio of 23 times 2000 projected earnings in line with the overall market., an EBITDA multiple of 10.2x and a TEV (total enterprise value) to EBITDA multiple of 15x."

By comparison, emerging market telcos have been averaging EBITDA multiples around the 13x level, against an 18 to 20x level for developed countries. Where TEV/EBITDA is concerned, other Asian companies such as Korea Telecom and Telekom Malaysia are trading at respective multiples of 8.5x and 10.1x.

Korea Telecom, in particular, has been cited by some observers as the most relevant international comparison. "Korea and Taiwan are both high-tech countries where penetration rates are high and a government-owned incumbent is under fierce pressure from new competitors," says one banker. "The main difference is that Korea Telecom was forced to face up to new entrants at a time when voice communications were all that were on offer, whereas now there are data communications to be bought into the picture as well."

"On the positive side," he adds, "We think that Chunghwa Telecom is well placed. It may be a large, slow moving government-owned entity at the moment, but it has ambitions to change this. We think that if you want a communications proxy for Asian growth, Taiwan is more exciting than both Australia and Malaysia and maybe as equally exciting as Korea."

"The key question," he concludes, "Is whether the company will exceed expectations after balancing out the risks posed by competition against growth prospects in an economy which has always had a strong high tech focus."

Mobile market share rapidly diminishing

Where its mobile operations are concerned, the company has not had a particularly good track record. After only three years of operation, for example, TCC surpassed Chunghwa's subscriber level for the first time this April. With 4.2 million subscribers, the company now commands a 34% market share, against Chunghwa's 32%, Far EasTone's 20%, KG Telecommunication's 18% and TransAsia and Mobitai Communications 3% each.

Until the award of three fixed line licenses in March, Chunghwa remained Taiwan's monopoly provider of fixed line services. From 2001, these revenues are expected to come under increasing pressure from: New Century Information Communications (NCIC) of which the Far Eastern group is a major shareholder; Taiwan Fixed Line owned by the Pacific group; and East Broadband Telecom.   

However, as analysts and the company itself has previously pointed out, Chunghwa will be able to retain a slight edge since its current operating system will not allow fixed line subscribers to switch to a new provider without first changing their number.

As of the Financial Year Ended June 30 1999, Chunghwa reported that 34% of its revenues were derived from local fixed line calls, 19.2% from long-distance fixed line calls, 21.2% from IDD calls, 19% from its mobile operations, 3.2% from paging and 2.4% from data communications.

The company's data communications arm HiNet ranks as Taiwan's largest ISP (Internet Service Provider) with 1.5 million subscribers and officials have somewhat optimistically forecast that within five years, this side of the business could become the company's biggest revenue driver.

In 1999, total revenue stood at NT$192.91 billion ($6.25 billion) against net profits of NT$50.36 billion. This year Chunghwa is forecasting that net profits will top the NT$60 billion mark for the first time.