Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual
report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ☒ Yes ☐ 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. ☐ Yes ☒ 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. ☒
Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). ☐ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐ Non-accelerated
filer ☐ Emerging growth company ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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. ☐ Item 17 ☐ 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 Exchange Act). ☐ Yes ☒ No
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
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 ROC government are to the government of the Republic
of China. All references to the Ministry of Transportation and Communications or the MOTC are to the Ministry of Transportation and Communications of the Republic of China. All references to the National Communications
Commission or the NCC are to the National Communications Commission 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. ROC GAAP means the generally accepted accounting principles of the Republic of China, U.S. GAAP means the generally accepted accounting principles of the United States, IFRSs means
International Financial Reporting Standards as issued by the International Accounting Standards Board, and Taiwan IFRSs means the International Financial Reporting Standards as issued by the International Accounting Standards Board and
endorsed by the Financial Supervisory Commission, or the FSC, which are required to be adopted by applicable companies in the ROC pursuant to the Framework for Adoption of International Financial Reporting Standards by Companies in the
ROC promulgated by the FSC on May 14, 2009. 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 on August 12, 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.
This annual report contains forward-looking statements, including statements regarding:
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 InformationD. 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 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 InformationD. 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.
A. Selected Financial Data
The selected consolidated statements of comprehensive income data and consolidated cash flows data for the years ended December 31, 2014,
2015 and 2016, and the selected consolidated balance sheets data as of December 31, 2015 and 2016 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 consolidated statements of comprehensive income data and consolidated cash flows data for the years
ended December 31, 2012 and 2013, and the selected consolidated balance sheet data as of December 31, 2012, 2013 and 2014 set forth below are derived from our audited consolidated financial statements, which are not included this annual
report. The consolidated financial statements have been prepared and presented in accordance with IFRSs.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions, except for
per share and per ADS data)
|
|
Consolidated Statements of Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
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|
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Revenues
|
|
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221.4
|
|
|
|
228.0
|
|
|
|
226.6
|
|
|
|
231.8
|
|
|
|
230.0
|
|
|
|
7.1
|
|
Operating costs
|
|
|
(141.5
|
)
|
|
|
(147.3
|
)
|
|
|
(148.4
|
)
|
|
|
(148.1
|
)
|
|
|
(147.6
|
)
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79.9
|
|
|
|
80.7
|
|
|
|
78.2
|
|
|
|
83.7
|
|
|
|
82.4
|
|
|
|
2.5
|
|
Operating expenses
|
|
|
(29.9
|
)
|
|
|
(33.1
|
)
|
|
|
(34.0
|
)
|
|
|
(33.2
|
)
|
|
|
(33.8
|
)
|
|
|
(1.0
|
)
|
Other income and expenses
|
|
|
(1.6
|
)
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
48.4
|
|
|
|
47.7
|
|
|
|
44.8
|
|
|
|
50.4
|
|
|
|
48.1
|
|
|
|
1.5
|
|
Non-operating
income and expenses
(1)
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
50.0
|
|
|
|
49.1
|
|
|
|
46.6
|
|
|
|
52.0
|
|
|
|
49.4
|
|
|
|
1.5
|
|
Income tax expense
|
|
|
(7.4
|
)
|
|
|
(6.5
|
)
|
|
|
(9.0
|
)
|
|
|
(9.1
|
)
|
|
|
(7.8
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
|
42.6
|
|
|
|
42.6
|
|
|
|
37.6
|
|
|
|
42.9
|
|
|
|
41.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders of the parent
|
|
|
41.5
|
|
|
|
41.5
|
|
|
|
37.0
|
|
|
|
42.1
|
|
|
|
40.5
|
|
|
|
1.3
|
|
Noncontrolling interests
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
1.1
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.6
|
|
|
|
42.6
|
|
|
|
37.6
|
|
|
|
42.9
|
|
|
|
41.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5.35
|
|
|
|
5.35
|
|
|
|
4.77
|
|
|
|
5.42
|
|
|
|
5.22
|
|
|
|
0.16
|
|
Diluted
|
|
|
5.33
|
|
|
|
5.34
|
|
|
|
4.76
|
|
|
|
5.41
|
|
|
|
5.21
|
|
|
|
0.16
|
|
Earnings per ADS equivalent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53.49
|
|
|
|
53.49
|
|
|
|
47.66
|
|
|
|
54.19
|
|
|
|
52.19
|
|
|
|
1.61
|
|
Diluted
|
|
|
53.34
|
|
|
|
53.40
|
|
|
|
47.58
|
|
|
|
54.06
|
|
|
|
52.11
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
40.2
|
|
|
|
(0.3
|
)
|
|
|
6.9
|
|
|
|
13.3
|
|
|
|
17.5
|
|
|
|
0.5
|
|
Long-term investments
|
|
|
19.7
|
|
|
|
15.3
|
|
|
|
13.1
|
|
|
|
10.5
|
|
|
|
7.2
|
|
|
|
0.2
|
|
Property, plant and equipment
|
|
|
297.3
|
|
|
|
302.7
|
|
|
|
302.7
|
|
|
|
296.4
|
|
|
|
291.2
|
|
|
|
9.0
|
|
Investment properties
|
|
|
7.8
|
|
|
|
8.0
|
|
|
|
7.6
|
|
|
|
7.9
|
|
|
|
8.1
|
|
|
|
0.3
|
|
Intangible assets
|
|
|
5.8
|
|
|
|
44.4
|
|
|
|
42.8
|
|
|
|
50.4
|
|
|
|
47.4
|
|
|
|
1.5
|
|
Net defined benefit assets
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.9
|
|
|
|
0.0
|
|
Total assets
|
|
|
440.0
|
|
|
|
441.0
|
|
|
|
446.5
|
|
|
|
452.8
|
|
|
|
446.9
|
|
|
|
13.8
|
|
Short-term loans
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.0
|
|
Current portion of long-term loans
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Long-term loans
(2)
|
|
|
2.1
|
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
0.0
|
|
Customers deposits
|
|
|
4.9
|
|
|
|
4.8
|
|
|
|
4.8
|
|
|
|
4.7
|
|
|
|
4.6
|
|
|
|
0.1
|
|
Net defined benefit liabilities
|
|
|
4.6
|
|
|
|
5.5
|
|
|
|
6.5
|
|
|
|
7.1
|
|
|
|
1.5
|
|
|
|
0.0
|
|
Deferred revenue
|
|
|
3.8
|
|
|
|
3.7
|
|
|
|
3.4
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
0.1
|
|
Total liabilities
|
|
|
76.6
|
|
|
|
77.8
|
|
|
|
80.8
|
|
|
|
83.4
|
|
|
|
79.9
|
|
|
|
2.5
|
|
Net assets
|
|
|
363.4
|
|
|
|
363.2
|
|
|
|
365.7
|
|
|
|
369.4
|
|
|
|
367.0
|
|
|
|
11.3
|
|
Capital stock
|
|
|
77.6
|
|
|
|
77.6
|
|
|
|
77.6
|
|
|
|
77.6
|
|
|
|
77.6
|
|
|
|
2.4
|
|
Equity attributable to stockholders of the parent
|
|
|
359.1
|
|
|
|
358.3
|
|
|
|
360.8
|
|
|
|
364.3
|
|
|
|
360.7
|
|
|
|
11.1
|
|
Noncontrolling interests
|
|
|
4.3
|
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
5.1
|
|
|
|
6.3
|
|
|
|
0.2
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions, except for percentages
and per share)
|
|
Consolidated Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
65.6
|
|
|
|
75.3
|
|
|
|
71.4
|
|
|
|
76.3
|
|
|
|
65.0
|
|
|
|
2
|
|
Net cash used in investing activities
|
|
|
(18.6
|
)
|
|
|
(49.1
|
)
|
|
|
(27.3
|
)
|
|
|
(30.4
|
)
|
|
|
(21.7
|
)
|
|
|
(0.7
|
)
|
Net cash used in financing activities
|
|
|
(42.5
|
)
|
|
|
(42.5
|
)
|
|
|
(35.1
|
)
|
|
|
(39.2
|
)
|
|
|
(42.5
|
)
|
|
|
(1.3
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4.5
|
|
|
|
(16.3
|
)
|
|
|
9.0
|
|
|
|
6.7
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
(3)
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
36
|
%
|
|
|
36
|
%
|
Operating margin
(4)
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
Net margin
(5)
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Capital expenditures
|
|
|
33.3
|
|
|
|
36.4
|
|
|
|
32.6
|
|
|
|
25.1
|
|
|
|
23.5
|
|
|
|
0.7
|
|
Depreciation and amortization
|
|
|
32.2
|
|
|
|
32.2
|
|
|
|
34.1
|
|
|
|
33.4
|
|
|
|
32.5
|
|
|
|
1.0
|
|
Cash dividends declared per share
|
|
|
4.63
|
(6)
|
|
|
2.39
|
(7)
|
|
|
4.86
|
|
|
|
5.49
|
|
|
|
4.94
|
(8)
|
|
|
0.15
|
(8)
|
Stock dividends declared per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes interest income of NT$742 million, NT$563 million, NT$288 million, NT$306 million and NT$189 million (US$5.8 million) for the years ended December 31, 2012, 2013, 2014, 2015 and
2016, respectively, and interest expense of NT$22 million, NT$36 million, NT$46 million, NT$33 million and NT$20 million (US$0.6 million) for the years ended December 31, 2012, 2013, 2014, 2015 and 2016, respectively.
|
(2)
|
Excludes current portion of long-term loans.
|
(3)
|
Represents gross profit divided by revenues.
|
(4)
|
Represents income from operations divided by revenues.
|
(5)
|
Represents net income attributed to stockholders of the parent divided by revenues.
|
(6)
|
In addition to the cash dividends from unappropriated earnings disclosed in table above, we also made cash distributions of NT$0.72 per share, which amounted to an aggregate of NT$5.6 billion, from additional
paid-in
capital.
|
(7)
|
In addition to the cash dividends from unappropriated earnings disclosed in the table above, we also made cash distributions of NT$2.14 per share, which amounted to an aggregate of NT$16.6 billion, from additional
paid-in
capital. See Item 5. Operating and Financial Review and ProspectsOverviewEffect of adopting Taiwan IFRSs on our dividends and employee bonuses.
|
(8)
|
Dividends for 2016, which are calculated based on Taiwan IFRSs, were approved by the board of directors in March 2017 and are expected to be declared at our annual general stockholders meeting scheduled on June
23, 2017.
|
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, 2016 have been
translated into U.S. dollar amounts using US$1.00=NT$32.40, set forth in the statistical release of the Federal Reserve Board on December 30, 2016. 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 NT dollars, as the case may be, at any particular rate or at all. On April
14, 2017, the exchange rate was NT$30.31 to US$1.00.
The following table sets forth, for each of the periods indicated, the low, average,
high and
period-end
exchange rates of the NT dollar, expressed in NT dollar per U.S. dollar. These rates are provided 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.
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
Average
(1)
|
|
|
High
|
|
|
Low
|
|
|
At Period
End
|
|
2012
|
|
|
29.56
|
|
|
|
30.27
|
|
|
|
28.96
|
|
|
|
29.05
|
|
2013
|
|
|
29.73
|
|
|
|
30.20
|
|
|
|
29.93
|
|
|
|
29.83
|
|
2014
|
|
|
30.38
|
|
|
|
31.80
|
|
|
|
29.85
|
|
|
|
31.60
|
|
2015
|
|
|
31.80
|
|
|
|
33.17
|
|
|
|
30.37
|
|
|
|
32.79
|
|
2016
|
|
|
32.13
|
|
|
|
33.74
|
|
|
|
31.05
|
|
|
|
32.40
|
|
October
|
|
|
31.59
|
|
|
|
31.79
|
|
|
|
31.36
|
|
|
|
31.54
|
|
November
|
|
|
31.75
|
|
|
|
32.01
|
|
|
|
31.41
|
|
|
|
31.92
|
|
December
|
|
|
32.00
|
|
|
|
32.42
|
|
|
|
31.72
|
|
|
|
32.40
|
|
2017 (through April 14)
|
|
|
30.63
|
|
|
|
32.37
|
|
|
|
30.14
|
|
|
|
30.31
|
|
January
|
|
|
31.65
|
|
|
|
32.37
|
|
|
|
31.19
|
|
|
|
31.19
|
|
February
|
|
|
30.85
|
|
|
|
31.17
|
|
|
|
30.61
|
|
|
|
30.64
|
|
March
|
|
|
30.65
|
|
|
|
31.03
|
|
|
|
30.14
|
|
|
|
30.38
|
|
April (through April 14)
|
|
|
30.47
|
|
|
|
30.63
|
|
|
|
30.31
|
|
|
|
30.31
|
|
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
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 CompanyB. Business OverviewRegulation 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.
For example, the NCC has been focused on promulgating rules related to
digital convergence. On August 3, 2016 the NCC published a new policy guideline, declaring to amend the framework governing digital convergence and to develop draft laws. On January 4, 2017 the NCC announced the preliminary draft of
Telecommunications Management Act and the draft Digital Communications Act and solicited comments from the public. After completing the public opinions collection, the NCC revised the draft and obtained approval from the
Commissions meeting on April 5, 2017. The draft will be submitted to the Executive Yuan for review and consideration recently. The draft covers the following key areas: (i) to reduce the entry barrier to the telecommunications
markets by changing the original concession/approval system to the approval/registration system; (ii) to make sure that the general market players shall have only ordinary obligations to the minimum necessary extent, provided that certain
players possessing a dominant market position as published by the competent authority will be subject to more stringent control measures; (iii) to revoke the right granted to telecommunications business to use private lands and buildings under
the existing Telecommunications Act; and (iv) to introduce the internet governance principle whereby self-discipline and self-control are to be the main governance mechanism for the internet. The new draft laws will reduce the entry barrier to
the telecommunications market, which is expected to increase the competition in the market. Also, it is likely that the Company will be regarded by the competent authority as possessing a dominant market position in specific telecommunication
service markets and will therefore be subject to special obligations involving a higher level of control by the authority. In addition, in view of the revocation of the right granted to telecommunications business to use private lands and buildings
under the existing Telecommunications Act, the difficulty in the developing infrastructure of telecommunications networks will be greatly increased.
5
The amendments to the Radio and Television Act, the Cable Radio and Television Act and the
Satellite Broadcasting Act were promulgated by the President on January 6, 2016. As these amendments focus primarily on lessening restrictions on cable broadcasting companies business operating location and accelerating digital
construction in the cable broadcasting industry, we believe that our broadband internet and multimedia on demand, or MOD, businesses may be faced with more vigorous competition. As the newly amended Radio and Television Act (a) prohibits system
operators from forcing content providers to offer differential treatment to other platforms in an inappropriate way, and (b) provides a legal basis for licensed shopping channels to be listed on the MOD platform, the amendment is helpful for
our MOD to obtain more comprehensive program content. Since lawmakers have not yet removed restrictions on governmental and political parties investments in the broadcasting industries, our MOD business remains subject to such restrictions.
We have been designated by the government as a dominant provider of fixed communications and 2G and 3G mobile services within the meaning
of applicable telecommunications regulations, and as a result, we are subject to special additional requirements imposed by the NCC. 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,
our competitiveness, market position and profitability will be materially and adversely affected.
In particular, future decreases in
tariff rates could immediately and substantially decrease our revenues. As a dominant Type I service provider under the Republic of China Telecommunications Act, or Telecommunications Act, we are constrained in our ability to raise prices. For
example, the NCC adopted the first three-year tariff reduction plan from April 2007 to March 2010, a second three-year tariff reduction plan from April 2010 to March 2013, and a third four-year tariff reduction plan from April 2013 to March 2017,
resulting in a number of price reductions in the tariff structures relating to our domestic fixed communications and mobile communications services. On March 8, 2017, the NCC announced a new plan for tariff reductions effective from April 1,
2017 to March 31, 2020. The reduction plan applies to the wholesale tariffs for IP peering and domestic leased line services, and to the monthly fees for fixed-line broadband access services (excluding
fiber-to-the-home,
or FTTH,
fiber-to-the-building,
or FTTB, asymmetric digital subscriber line, or ADSL, and the services which downlink and uplink speeds
both over 100 Mbps). See Item 4. Information on the CompanyB. Business OverviewRegulation and Item 5. Operating and Financial Review and ProspectsOverviewTariff 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, the relevant authority might require us to reduce tariffs over some services through other regulatory measures or administrative
planning. For example, after the article 14 of the Regulations Governing Network Interconnection among Telecommunications Enterprises was amended, the NCC announced an administrative planning to decrease tariff in the mobile interconnection fees
over a period of four years starting on January 5, 2013. On November 4, 2015, the NCC reviewed and determined to decrease our fixed telecommunications network interconnection fees and it was made retroactive since January 1, 2015. The
regulatory framework within which we operate may limit our flexibility to respond to market conditions, competition or changes.
If we fail to
comply with the regulations of the ROC Fair Trade Act, we may be investigated and fined.
As a provider of telecommunication
products and services, our business operations are subject to the regulations of the ROC Fair Trade Act, or the FTA, which is administered and enforced by the ROC 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 any regulations promulgated by the FTA. The consequences of any such violations could have a material adverse effect on our business and results of operations. See
Item 4. Information on the CompanyB. Business OverviewRegulation for a discussion of the FTA applicable to us. In March 2015, the FTC found us liable for providing false and misleading data in advertisement comparing our
services against our competitors on our 100 million bits per second, or Mbps, fiber broadband plus TV programs service in the PingTung area. The FTC consequently ordered us to pay a fine of NT$0.8 million, which we paid in March 2015. We
have been investigated and penalized by the FTC in the past and may continue to be investigated or penalized by the FTC in the future if we fail to comply with the relevant regulations. 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.
6
If we do not or 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, our 3G mobile services license is valid until December 31, 2018, and may need to attend the auction for such license which will be held in the
second half of 2017. On April 30, 2014, we obtained the mobile broadband services license adhering to the principle of technological neutrality for our 4G mobile broadband services, which is valid until the end of 2030. On March 23, 2016,
we obtained the mobile broadband services license for 2500MHz and 2600MHz frequency bands, which is valid until the end of 2033. If we are unable to successfully acquire and maintain the rights to use the licenses or frequency spectrums that we need
for our future business operations, our business prospects and future results of operations may be materially and adversely affected. Furthermore, our 2G service license will expire in June 2017 and the NCC will not issue a new 2G license to us in
accordance with their policy to cease such 2G service in Taiwan. As a result, we may cease to provide such 2G service by the end of August 2017 according to the discussion with the NCC. If some of the 2G service customers are unwilling to migrate by
the time, we may face complaint or even be liable for losses claimed from such customers.
Increasing market competition may adversely affect our
growth and profitability by causing us to lose customers, charge lower tariffs or spend more on marketing.
As of the date of this
annual report, there are five mobile network operators in Taiwan providing 4G mobile broadband services. Each mobile network operator, including us, has been offering aggressive promotional programs to attract consumers, such as unlimited data
plans, when many mobile network operators around the world have eliminated unlimited data plans. We cannot assure you that we will be able to raise our revenues from 4G mobile broadband services in light of the intense market competition, which
could have a material adverse effect on our business prospects and our future results of operations.
We also face increasing fixed
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. The government has mandated
the 100% digitization of cable television networks by December 31, 2017, which would increase the availability of high-speed internet services from cable operators. Furthermore, after the NCC relaxed the zoning restrictions on service areas for
cable operators on July 27, 2012, new cable operators started to attract subscribers with limited channels and lower fee charges. As a result, we could face increased competition for our broadband access services and 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.
In addition, our over the top, or OTT, business may not able to compete with video streaming providers such as Netflix, Inc. and iQiyi, which
invest extensively in contents and productions of original films and TV series. Our OTT customers might be attracted by its massive and exclusive titles, and our OTT business growth might slow down and be limited.
As the mobile data access speeds have increased with newer technologies, such as 4G Long Term Evolution, or LTE, some customers have replaced
fixed broadband services with high speed mobile broadband services. Rates of customer growth have declined in our fixed broadband and mobile businesses and may decline further, which may 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.
7
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 insurance to
cover damage 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 2016, we recorded losses on property, plant
and equipment arising from natural disasters such as earthquakes and typhoons in the amount of approximately NT$11.2 million (US$0.3 million). The occurrence of natural disasters could impact our ability to deliver services and have a negative
effect on our results of operations.
Furthermore, we might also be liable for losses claimed from our customers that were incurred from
our failure to deliver our services. These potential liabilities could also have a material adverse effect on our results of operations.
We are
subject to litigation or other legal proceedings that could expose us to substantial liabilities.
We are from time to time
involved in various litigation, arbitration or administrative proceedings in the ordinary course of our business. Any such claims, whether with or without merit, asserted or threatened, could be time-consuming and expensive to defend and could
divert our managements attention and resources. See Item 4. Information on the CompanyB. Business OverviewLegal Proceedings. 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.
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. We may not be able to retain our present personnel or attract additional qualified personnel as
and when needed. 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. The major
three telecom operators in Taiwan, including us, are expanding the information and communication technology, or ICT, business and may increase the number of their employees as part of this expansion. In addition to telecom operators, some computer
design companies and manufacturers are also expanding their business into this area and have been recruiting information technology related employees as well. We cannot assure you that we will be able to successfully attract and retain new
information technology related employees. 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.
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 order to continue to develop our business and offer new and more sophisticated services, we intend to continue to invest in different 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 continue making substantial capital expenditures to further develop our range of services and products.
Commercial acceptance by consumers of the 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 the expected return from our investments.
8
We cannot assure you that services enabled by the new technologies we are implementing, such as
Internet of Things, or IoT, software-defined network, or SDN, network functions virtualization, or NFV, LTE WLAN aggregation, or LWA, license assisted access, or LAA, voice over LTE, or VoLTE, 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 that 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
recognized impairment losses for investment properties, equipment and intangible assets in the past. In 2016, we concluded that the recoverable amount representing the fair value less costs to sell investment properties was higher than the carrying
amount. Therefore, we recognized a reversal of impairment loss of NT$0.1 billion (US$4.6 million) and the amount was recognized only to the extent of impairment losses that had been recognized in prior years. In 2016, we also determined that
parts of our telecommunications equipment were impaired and recognized an impairment loss of NT$0.6 billion (US$18.4 million).
We
cannot assure you that we will be able to continue to maintain control of and consolidate the results of operations of our minority-owned subsidiaries. For example, we consolidate the results of operations of our subsidiary, Senao International Co.,
Ltd., or Senao, because we have remained control over Senaos relevant activities. Please refer to Note 3 and Note 15 to our consolidated financial statements included elsewhere in this annual report for details of the relationship between
Senao and its parent company. We cannot assure you that we will be able to continue maintaining control over Senaos relevant activities. If we lose control of our minority-owned subsidiary, we will no longer be able to consolidate the results
of operations of such subsidiary, which could adversely affect our consolidated results of operations and ability to meet the operating results guidance that we have projected.
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 2016, we evaluated and concluded that certain investments were impaired, and as a result we recognized an
impairment loss of NT$0.6 billion (US$17.8 million) for
available-for-sale
financial assets due to the decline in fair value owing to adverse changes in the
industry conditions and the operating performance that was below our 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.
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
telecommunications industry in Taiwan 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.
9
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 to effectively respond to technological changes, such as the continued expansion of our fiber optic
networks and 4G mobile broadband networks. To meet the increasingly robust high-bandwidth requirements of digital convergence services, we continue to expand construction of fiber optic networks, including passive optical networks, or PONs, and
optical distribution networks, or ODNs. With respect to 4G mobile broadband networks, in December 2014, we expanded the network coverage by refarming the 900MHz frequency band from 2G to 4G mobile broadband and began implementing the carrier
aggregation, or CA, technology of
LTE-Advanced,
or
LTE-A,
in the 900MHz and 1800MHz frequency bands to provide higher data transmission rates. Also, we continue to
deploy 4G mobile broadband base stations with 900MHz, 1800MHz, and 2600MHz frequency bands of mobile broadband services and to enhance our 4G mobile broadband coverage and capacity. 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 domestic 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 the 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.
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 constantly evaluating new growth
opportunities in the broader telecommunications industry. 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 but 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 IoT services is substantially dependent on the availability of applications and
devices that are being developed by third-party developers, and on whether we will be able to achieve a sustainable business model for consumer segments of the market. These applications or devices may not be sufficiently developed to support the
deployment of our mobile data services. If we are unable to 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.
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.
As an internet service provider, our system is susceptible to cyber security risks,
including hijack attacks, phishing attacks, hackers intrusions to steal customers 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 damage 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 cyber security protection costs, lost revenues, litigation and reputational damage due to cyber attacks.
Our largest stockholder may take actions that conflict with our public stockholders best interests.
As of December 31, 2016, our largest shareholder, the government of the ROC, through the MOTC, 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 MOTC, may continue to have the ability to control our
business, including matters relating to:
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any sale of all or substantially all of our assets;
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the approval of our annual operation and projects budget;
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the composition of our senior management;
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the timing and distribution of dividends;
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the election of a majority of our directors; and
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our business activities and direction.
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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
revenue 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.
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 our internal control over financial reporting has been audited by Deloitte & Touche, an
independent registered public accounting firm, which has also audited our consolidated financial statements for the year ended December 31, 2016. 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 ProceduresAttestation 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, and could result in lawsuits being filed
against us by our stockholders or otherwise harm our reputation.
If we fail to maintain a good relationship with our labor unions, 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, except for the chief manager of each department, most 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 unions 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 unions, such as increasing channels of communications by holding periodic labor resource review meetings and guaranteeing our labor unions a seat on our board of directors, we cannot assure you
that we will be able to maintain a good relationship with our labor unions. Any deterioration in our relationship with our labor unions could result in work stoppages, strikes or threats to take such an action, which could disrupt our business and
operations, materially and adversely affect the quality of our services and harm our reputation.
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Any 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. In particular, Taiwans
economy is highly dependent on the technology industry, and any downturn in the global technology industry may have a material adverse effect on Taiwans economy, which in turn, could adversely affect the demand for our products and services.
There have also been concerns over the armed conflicts and civil unrest in the Middle East, Africa and Ukraine, which has resulted in higher volatility on oil prices and stock markets, and the economic slowdown in Mainland China, which could have a
material adverse effect on economies around the world. There have also been concerns over the expected withdrawal of the United Kingdom from the European Union as well as the outcome of the upcoming elections in the European countries, such as
France and Germany, which could also cause turbulence in the international markets and Taiwans market as well.
As our business is
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 ROC and the Peoples 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 ROC 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 Peoples Republic of China, or PRC, claims that it is the sole government in China and that Taiwan is part of China.
In addition, the PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations
between the ROC and the PRC have on occasion depressed the market prices of the securities of companies in the ROC. Relations between the ROC 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 ROC and PRC require companies involved
in cross-strait business operations to carefully monitor their actions and manage their relationships with both ROC and PRC governments. In the past, companies in the ROC, including us, have received minor sanctions such as travel restrictions or
minor monetary fines by the ROC and/or PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the ROC 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 avian influenza, Zika virus, dengue fever or Ebola virus, 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.
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Stockholders may have more difficulty protecting their interests under the laws of the ROC 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 ROC. 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 difficulties 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.
Our actual financial results may differ materially
from our published guidance.
Prior to 2013, we voluntarily published our operating results guidance on an annual basis in
accordance with the ROC GAAP. Starting in 2013, we continued to voluntarily publish our operating results guidance on an annual basis in accordance with the Taiwan IFRSs. We may from time to time update our operating results guidance after
evaluating the effects of any changes to the estimates and assumptions that we used to calculate our projections of our operating results. Our projections are based on a number of estimates and assumptions that are inherently subject to significant
uncertainties and contingencies, including the risk factors described in this annual report. In particular, our 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.
Our results of operations and financial condition under Taiwan IFRSs may differ materially from our reported results of operations and financial
condition under IFRSs.
While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt IFRSs for certain filings with the
SEC, including our annual reports on Form
20-F.
Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any new or amended standards or interpretations applicable under
IFRSs may not be timely endorsed by the FSC. Furthermore, the dividends for 2016 that are expected to be declared at our 2017 annual general stockholders meeting are calculated based on Taiwan IFRSs. It is difficult for us to determine the
differences between Taiwan IFRSs and IFRSs on our financial statements as any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC.
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 government of the ROC 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.
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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 TWSE, 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 TWSE. The TWSE 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. During 2016, the TWSE Index reached a low of 7,664.01 on January 21, 2016, and peaked at
9,392.68 on December 9, 2016. On April 18, 2017, the TWSE Index closed at 9,746.56. The TWSE 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 government of the ROC 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
governments 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 TWSE 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 ROC limit foreign ownership of our common shares. Prior to
March 1, 2006, the MOTC, 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 NCC on March 1, 2006, the NCC replaced the
MOTC as the competent authority under the Telecommunications Act pursuant to the National Communications Commission Organization Act, or the Organization Act. The NCC and the MOTC reached an agreement on foreign ownership of Chunghwa Telecom. An
announcement issued by the MOTC 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 18, 2017, foreign direct holdings of our outstanding share capital is at 17.17%. 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 NCC will exercise its authority over us, or whether NCC will lower the foreign ownership cap at any time.
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 ROC 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;
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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
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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.
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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, or NYSE, may differ from the prevailing market price of the equivalent number of our common shares on the TWSE.
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.
Generally, ADS holders will not be able to exercise voting rights attached to the underlying securities on an individual basis.
Under the deposit agreement, the voting rights attached to the underlying 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. The election
of our directors 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 ROC. Under the current laws of the ROC, an ADS holder or the depositary, without obtaining further approvals from the Central Bank of the ROC (Taiwan) or any other governmental authority or agency of the ROC, may convert
NT dollars into other currencies, including U.S. dollars, in respect of:
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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
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any cash dividends or distributions received from the common shares represented by ADSs.
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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 ROC (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 ROC (Taiwan) will grant approval as a routine matter, required
approvals may not be obtained in a timely manner, or at all.
Under the ROC Foreign Exchange Control Law, the Executive Yuan of the ROC
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 TWSE
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-ROC
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 ROC to appoint an agent, also referred to as a tax guarantor, in the ROC for filing tax returns and making tax payments. A tax guarantor must meet
certain qualifications set by the Ministry of Finance of the ROC and, upon appointment, becomes a guarantor of your ROC 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 ROC 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 ROC, you will be required to be registered as a foreign
investor with the TWSE for making investments in the ROC 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 ADS facilities on the TWSE.
ITEM 4.
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INFORMATION ON THE COMPANY
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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 privatization
efforts by the government of the ROC and operate under the Statute of Chunghwa Telecom Co., Ltd. Prior to our formation, we were operating as a business unit of the Directorate General of Telecommunications, which was formerly the NCC. The common
shares of the Company have been listed on the TWSE under the number 2412 since October 2000 and its ADSs have been listed on the NYSE under the symbol CHT since July 2003. We were privatized as a result of a secondary ADS
offering and concurrent domestic auction of our common shares on August 12, 2005, as the ownership by the government of the ROC was reduced to less than 50%. The privatization has enabled us to develop our business and respond to changing
market conditions more rapidly and efficiently. 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, ROC, 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. Our agent for
service of process in any suit or proceeding arising out of or relating to our shares, ADSs, American depository receipt, or ADR, and deposit agreement in the United States is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.
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We are the largest telecommunications service provider in Taiwan and one of the largest in Asia
in terms of revenue. As an integrated telecommunications service provider, our principal services include:
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domestic fixed communications services, including local and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services,
Wi-Fi
services, MOD services, domestic data services and other domestic services;
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mobile communications services, including mobile voice and data services, sales of mobile handsets, tablets, data cards and other mobile services;
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internet services, including data communication services, such as HiNet, application value-added services, or VAS, and services provided to the government;
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international fixed communications services, including international long distance telephone services, international leased line services, international data services, satellite services and other international
services; and
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other services, including
non-telecom
services.
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In
addition to these traditional telecommunication services, we also focus on selected ICT services and advanced development.
For each of
our key services, we enjoy leading positions across a number of areas in terms of both revenues and customers:
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we are Taiwans largest fixed communications services provider as well as Taiwans largest mobile communications service provider;
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we are Taiwans largest broadband access provider; and
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we are Taiwans largest internet service provider.
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In 2016, our revenues were
NT$230.0 billion (US$7.1 billion), our consolidated net income was NT$41.6 billion (US$1.3 billion) and our basic earnings per share was NT$5.22 (US$0.16).
In 2016, we made capital expenditures totaling NT$23.5 billion (US$0.7 billion). See Item 5. Operating and Financial Review and
ProspectsB. Liquidity and Capital ResourcesCapital Expenditures for a detailed discussion of our capital expenditures.
Competitive
Strengths
We believe that we are well positioned to take advantage of the increasing 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.
We believe that our primary competitive strengths are:
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our premium brand and broad customer base in Taiwan;
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our position as an integrated, full-service telecommunications provider in Taiwan; and
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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 4G mobile broadband networks, our expansion of fiber to the x, or FTTx, broadband access services,
IP-based
MOD services, fixed-line/mobile VAS and cloud computing related services.
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We have premium brand and 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. We believe our
broad customer base in each of our service offerings grants us a competitive advantage to maintain our existing 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 place us in a positive position to offer converged products and services to our customers. In
addition, by leveraging our capability to analyze Big Data, we are able to adopt marketing initiatives to target different customer groups interests and preferences and increase the effectiveness of our cross-marketing efforts of our products
and services to our existing and potential 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 VAS 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
last-mile infrastructure in Taiwan, which comprises the connection between the local telephone service providers switching centers to the
end-users
buildings or homes, provides us with
access to existing and potential customers and creates a platform for expanding our services. In order to provide higher bandwidth services for our customers, we have been constructing our FTTx network since 2003. We have successfully migrated many
of our customers from ADSL service to FTTx service, which offers even higher speeds by using fiber optic technology. Since 2016, the number of our FTTx subscribers has exceeded three quarters of our total fixed broadband access subscribers. As of
December 31, 2016, network coverage of FTTx with speeds of 100 Mbps and higher was approximately 88.7%. In addition, our mobile communications network provides nationwide coverage. Our large mobile spectrum allocation together with our
extensive network coverage positions us well for the continued expansion of our mobile services in Taiwan. We are also continuing to build our
Wi-Fi
network to offload mobile network capacity in residential
areas and public areas where subscriber density and usage is high, such as urban areas, airports and convenience stores.
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 customer base through our
extensive customer service network in Taiwan. See B. Business OverviewMarketing, Sales and DistributionSales and Distribution. We are continuing to transform our retail stores while increasing the number of our service
centers throughout Taiwan. 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 2016, we obtained several domestic and international awards which recognized our service quality, corporate governance and our fulfillment of corporate social responsibility. In the Readers
Digest Trusted Brands Awards, we have stood out and won the Platinum Award of Telecom Company in Taiwan for 12 consecutive years since 2005. We also were awarded the 2016 Best Practices Award for Asia Pacific LTE Service Provider by Frost &
Sullivan. In addition, we have been awarded The Asset Corporate Platinum Award by The Asset Magazine for four consecutive years since 2013. We were also ranked among the top five percent of TWSE-listed companies and the Taipei Exchange traded
companies for corporate governance based on an evaluation conducted by TWSE for two consecutive years since 2015. Furthermore, we were also awarded the Excellence in Corporate Social Responsibility Award in Taiwan by Common Wealth Magazine for 10
consecutive years since 2007.
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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.
We have the capital resources and technology to enhance our leading position.
Strong capital structure
. We believe we have great financial resources in Taiwan. Our low
debt-to-equity
capital structure, together with our strong 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 fiber-optic networks, 4G mobile broadband networks and service platforms. We will continue to make investments in or to acquire other companies which provide complementary telecommunications and ICT-related services to further
expand our business and offer new products and services.
Advanced network technology
. In recent years, we have upgraded some of
our FTTx access networks to FTTH access networks, aiming at promoting our broadband services from megabit connectivity to gigabit connectivity and strengthening our leading position in bandwidth services in our industry. In 2016, we also continued
to deploy our 4G mobile broadband networks. 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
. In 2016, our research and development expenses accounted for 1.6% of our revenues. 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
Strategies
Our key strategic objectives are to maintain our position as a leading integrated telecommunications services provider in
Taiwan and to enhance our profit margins of ICT services by leverage our strengths of research and development.
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
We endeavor to maintain our strong market position in telecommunication business and seek to
expand the scope of our business beyond network services by offering service platforms and VAS to capture new opportunities and generate revenue growth, such as IoT platforms. We also continue to advance our MOD/OTT service platform which offers
digital contents, live broadcasting, interactive video, and high quality subscription video on demand, or SVoD, services. In addition, we cooperate with content and software providers to develop new services.
Broadband services
: We strive to maintain our broadband market share. We typically realize higher average revenue per user, or ARPU,
for our FTTx internet services, and we expect to continue to offer various incentives for our FTTx customers to upgrade to even higher speed FTTx services and for our ADSL customers to upgrade to FTTx services. We are continuing the
build-out
of our FTTx infrastructure, and we believe these efforts will help us maintain our competitive advantage for broadband services. A high quality broadband network is also essential for our high-definition
MOD services.
19
Mobile Communications
: We obtained the 4G mobile broadband license in April 2014 and
launched our 4G mobile broadband services in May 2014. In March 2016, we obtained the mobile broadband license for 2500MHz and 2600MHz frequency bands which enables us to enhance our 4G mobile broadband network. Our strategy for mobile services
includes the following initiatives:
|
|
|
Enhancing 4G mobile broadband network construction to accommodate the increasing mobile data usage from consumers as a result of the growth of connected devices, such as smartphones and tablets;
|
|
|
|
Encouraging the migration of 2G service subscribers to 3G and 4G mobile services by offering promotions on various mobile handsets combined with attractive VAS and product packages;
|
|
|
|
Introducing
low-
to
mid-tier
smartphones to expand our mobile internet subscriber base; and
|
|
|
|
Maintaining ample
Wi-Fi
hotspots to offer more wireless internet access service and to offload data traffic from our mobile networks; we had established 60,000
Wi-Fi
hotspots by the end of 2016.
|
Internet services
: Our strategy for internet
services is to continue to build on the success of our HiNet internet services and enhance our internet VAS, such as internet music and internet protocol video services, including CHT OTT service, an OTT platform where customers can view videos and
multimedia content.
Emerging services
: We have been providing ICT services since 2009. We continue to leverage our core
telecommunication infrastructure and services to expand ICT services, including intelligent environment network service, or iEN, intelligent transportation service, or ITS and IoT. Our experience with ICT services positions us well to develop and
offer cloud computing services. Underpinning the rollout of our cloud computing services is our capability and experience in offering data center services to corporate customers, which includes our initiative to build the largest cloud computing
data center in Taiwan in anticipation of the growing demand for this service. The Panchiao Internet Data Center, or IDC, one of the highest-rated,
TIA-942
Rated 4, data centers in the world, commenced
operations since July 2016 and offer high reliability, high speed and high security cloud services to multi-national and domestic corporate customers. We will further expand our IDC business opportunities in areas of financials, securities, digital
contents and
e-commerce.
With the strength and reliability of our technologies and services, we believe that we have the competitive advantages to continue expanding our ICT services in the future.
We consistently expand the scope and variety of our integrated services to create more value for our customers. We have been developing an OTT
platform and building relationships with content providers and service providers to offer attractive content and services on the platform. Our strategy on MOD/VOD/OTT services is to enrich content, including by providing movies, drama, and TV series
for SVOD, to enhance the user interface, to leverage our existing base of fixed broadband and 4G mobile broadband subscribers to boost our MOD and OTT subscribers, and to acquire content with all rights across different devices to become the leading
IPTV/OTT service provider in Taiwan.
In addition, we continue to develop our mobile payment service, Hami Wallet, with our customer
loyalty program.
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 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. Our corporate customer services cover small,
medium-sized
and large enterprises. As of December 31, 2016, our Enterprise Business Group employed 504 professionals and offered packaged and customized services, customer-oriented solutions and
integrated ICT 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. To improve the quality of our customer services, we implemented a customer relationship management system, which encompasses a customer complaint system, a business information database for the use of our
call centers, and a Big Data system to enhance our sales and market analysis efforts. For example, we leverage our capability to analyze Big Data in identifying locations for constructing base stations and target groups for marketing our services.
20
In addition, we own hundreds of physical service stores, and we will continue to renovate our
traditional service stores to enhance user experience. Please refer to Competitive StrengthsWe are an integrated full-service telecommunications provider in Taiwan for a discussion of our distribution channels.
Improve operational and cost efficiency
We have historically been focused, and will continue to focus, on cost control. We continue to improve our operational and cost efficiency by
migrating to more advanced networks and sophisticated operational support systems.
Our long-term goal is to optimize our capital
expenditures by focusing on investing in innovative products and services with attractive return profiles. To catch up with the fast evolution of digital devices and network applications, we continue the construction of our fiber-based fixed-line
and mobile network to increase the network bandwidth and enhance operational efficiencies. We continue to accelerate LTE network construction to enhance population coverage and construct high capacity
Wi-Fi/Fiber-Wireless
networks to offload mobile network traffic. We will continue to leverage our core telecommunication infrastructure and services to expand the ICT business, including cloud services,
enterprise total solutions and government projects.
Expand our business through alliances, acquisitions and investments
We continuously expand our business in high-growth areas, such as ICT 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 content providers, multimedia service platform providers, customer premises equipment providers, internet portal operators, and ICT solutions partners
to diversify our business
operations and enhance our service offerings. In May 2016, we formed an alliance with Acer Inc. to help enterprises build intelligent mobile network in offices. In December 2016, we strengthened our relationship with China Mobile Ltd. on the
Hand-in-Hand
Program, or
hi-H
Program, in areas including mobile business, data business, innovation and internet business; members of
hi-H
Program include operators from some major countries such as German, France and Korea. In January 2017, we cooperated with Nokia to perform
Pre-5G
NarrowBand-IoT
test, which help accelerate the application of IoT in Taiwan. In February 2017, we signed a memorandum with NTT Group and ITOCHU Corporation to develop SDN and NFV and further increase flexibility on
framework of our network. In February 2017, we also cooperated with HTC Corporation, Sercomm Corporation and MediaTek Inc. to launch LWA service. In addition, in Mobile World Congress 2017, we entered into a memorandum of understanding with Nokia in
respect of the cooperation in developing 5G technology, cloud computing, IoT and automation of telecommunications network. At the same congress, we also entered into a memorandum with Ericsson in respect of cooperation in developing 5G application,
including traffic and public utilities. In March 2017, we cooperated with Cisco Systems, Inc. to provide enterprises total solutions in different areas, such as network, information security and data center virtualization.
Acquisition 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. 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:
In February 2014, we, together with Benefit One Asia Pte. Ltd., established Chunghwa Benefit One Co., Ltd., or Chunghwa Benefit One, and we
owned a 50% equity interest in Chunghwa Benefit One. Chunghwa Benefit One mainly engages in providing an
e-commerce
platform for enterprises to provide employee benefits and for individuals. In December 2016,
both Benefit One Asia Pte. Ltd. and we agreed to dissolve Chunghwa Benefit One, because the financial performance of the company is below our expectation.
21
Senao acquired 70% of the equity interests in Youth Co., Ltd and its subsidiaries, or Youth, in
September 2015, and established 100% of the equity interests in Aval Technologies Co., Ltd. in October 2015. Both Youth and Aval Technologies Co., Ltd. are primarily engaged in the businesses of providing information technology services and selling
communication products. In December 2015, Senao participated in the share subscription of Youth at a percentage different from its original ownership percentage. Therefore, Senaos ownership interest in Youth increased from 70% to 89.48%.
One of our consolidated subsidiaries, Chunghwa Precision Test Tech Co., Ltd., or CHPT, a semiconductor testing company, was listed on the
General Stock Market of the Taipei Exchange (formerly known as Gre Tai Securities Market) since March 24, 2016. Benefitting from its advanced technology and
one-stop
shopping service, CHPTs business
continued to grow in the past few years.
Chunghwa Leading Photonics Tech Co., Ltd., or CLPT, was founded in July 2016, and we hold 75% of
its equity interests. CLPTs management team came from our Telecommunication Laboratories. The company has the fabrication and packaging technology for development and application on indium-gallium-arsenide photodetector.
Please also see Notes 3, 15, and 16 to our consolidated financial statements included elsewhere in this annual report for our current
strategic investments.
Going forward, we will focus on digital economy and innovative businesses and may consider making other equity
investments and acquisitions that we believe are complementary to our business and strategic goals. For example, we have joined Asian Silicon Valley Development Plan. By cooperating with other companies and leveraging our advantages, we strive
to gain market share in the IoT business. Furthermore, pursuant to the governments southbound development policy, we will continue to explore opportunities to strengthen our cooperation with companies in ASEAN countries and expand our
geographic footprint, either in traditional telecommunication business, IoT or ICT businesses.
Maintain focus on maximizing stockholder value
We are committed to maximizing stockholder value and intend to maintain a sustainable dividend 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.
Under the ROC Company Act, companies are allowed to distribute special cash dividend from capital surplus, which we had implemented at our
annual general stockholders meetings in 2013 and 2014. See Item 5. Operating and Financial Review and ProspectsOverviewEffect of adopting Taiwan IFRSs on our dividends and employee bonuses. In addition, the accumulated
legal reserve that we had set aside in previous years has amounted to the aggregate par value of our outstanding share capital. Therefore, according to relevant regulations, we are not required to appropriate profits to our legal reserve starting
from 2015. With the approval of our board of directors in March 2017, our payout ratio was 95.7% in 2016 after adjusting for unappropriated earnings and setting aside the special reserve. See Item 8. Financial InformationA. Consolidated
Statements and Other Financial Information.
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.
22
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 telephone services and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services,
Wi-Fi
services, MOD services, and other
domestic services including ICT services. We also provide interconnection with our fixed-line network to other mobile and fixed-line operators. Our revenues from domestic fixed communications services were NT$72.1 billion, NT$72.5 billion
and NT$72.8 billion (US$2.3 billion), respectively, in 2014, 2015 and 2016, representing 31.8%, 31.3% and 31.6% of our total revenue in such periods.
Local Telephone
The following
table sets forth our revenues from local telephone services for the periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
(in millions)
|
|
Local telephone revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Usage
|
|
|
16.0
|
|
|
|
14.5
|
|
|
|
12.9
|
|
|
|
399.2
|
|
Subscription
|
|
|
16.3
|
|
|
|
16.1
|
|
|
|
15.9
|
|
|
|
490.0
|
|
Interconnection
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
23.7
|
|
Pay telephone
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
6.9
|
|
Other
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
57.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35.6
|
|
|
|
33.6
|
|
|
|
31.6
|
|
|
|
976.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide local telephone services to approximately 10.94 million customers in Taiwan. Our fixed-line
network reaches virtually all homes and businesses in Taiwan. Revenues from local telephone services comprised 15.7%, 14.5% and 13.8% of our total revenues in 2014, 2015 and 2016, respectively. Approximately 73.7% of our local telephone customers as
of December 31, 2016 were residential customers. We are currently the leader of the local telephone service market, with an average subscriber market share of approximately 94.3%, 94.0% and 93.5% in 2014, 2015 and 2016, 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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|
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|
|
|
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|
|
|
|
As of December 31
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|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in thousands, except percentages
and per household data)
|
|
Taiwan population
(1)
|
|
|
23,434
|
|
|
|
23,492
|
|
|
|
23,540
|
|
Fixed line customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
8,395
|
|
|
|
8,239
|
|
|
|
8,067
|
|
Business
|
|
|
2,970
|
|
|
|
2,928
|
|
|
|
2,872
|
|
Total
|
|
|
11,365
|
|
|
|
11,167
|
|
|
|
10,939
|
|
Penetration rate (as a percentage of the population)
|
|
|
47.5
|
%
|
|
|
47.5
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%
|
|
|
46.5
|
%
|
Lines in service per household
|
|
|
1.00
|
|
|
|
0.97
|
|
|
|
0.94
|
|
(1)
|
Data from the Department of Population, Ministry of the Interior, ROC.
|
With the continued
development of mobile technologies, demand for local customer lines has been declining. The number of fixed-line customers decreased by 1.8% in 2014 compared to 2013, 1.7% in 2015 compared to 2014 and 2.0% in 2016 compared to 2015. 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.
23
The following table sets forth information with respect to local telephone usage for the periods
indicated.
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|
|
|
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|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in millions, except percentages)
|
|
Minutes from local calls
(1)(2)
|
|
|
11,567
|
|
|
|
10,511
|
|
|
|
9,481
|
|
Growth rate (compared to the same period in the prior year)
|
|
|
(10.6
|
)%
|
|
|
(9.1
|
)%
|
|
|
(9.8
|
)%
|
(1)
|
Includes minutes from local calls made on pay telephones and minutes from fixed
line-to-mobile
calls.
|
(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 decreased in 2014, 2015 and 2016 due to the impact of mobile substitution and increased use of voice over internet
protocol, or VoIP, applications.
We charge our local telephone service customers a monthly fee and a usage fee. We also charge separate
fees for some VAS. The monthly fees for our primary tariff plans are NT$70 for residential customers and NT$295 for business customers. Our primary peak time usage fee is NT$1.6 for three minutes, and our
off-peak
usage fee is NT$1.0 for ten minutes. Our usage fees are the same for residential and business customers.
The following table sets forth information with respect to the average local telephone usage charge per minute for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
Average local telephone usage fee (per minute)
|
|
|
1.39
|
|
|
|
1.39
|
|
|
|
1.37
|
|
Growth rate (compared to the same period in the prior year)
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)%
|
Average per minute usage charges remained relatively stable from 2014 to 2016. Average per minute usage
charges decreased 1.4% to NT$1.37 in 2016, mainly due to the increase in number of users of mobile phones and VoIP telephony services, which also led to a decrease in total revenue derived from local telephone usage. Part of our competitive strategy
is to offer customers innovative products and services intended to both secure customer loyalty and increase revenues. In particular, our VAS offerings are designed to increase our call revenues by increasing the number of calls our customers make
and by receiving fees for usage of the VAS. 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 were
NT$3.3 billion, NT$3.1 billion and NT$2.9 billion (US$0.1 billion) in 2014, 2015 and 2016, respectively, representing 1.5%, 1.3% and 1.3% of our total revenues in such periods. This decrease was mainly due to the continuous decline in
call minutes resulting from the migration to mobile services and increased use of VoIP applications. Our average market share by minutes in the domestic long distance market was approximately 80.5%, 82.2% and 83.0% in 2014, 2015 and 2016,
respectively.
We provide
so-called
intelligent network services over our domestic
long distance network, including toll-free calling and virtual private networks, or VPN, services and others. We also focus on offering our customers an increasing number of VAS with flexible tariff packages.
Broadband (FTTx and ADSL) Access
We provide broadband internet access through connections based on our FTTx and ADSL technologies. 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.
Our revenues from our broadband access services in 2014, 2015 and 2016 were NT$19.1 billion, NT$19.3 billion and
NT$19.0 billion (US$0.6 billion), respectively. 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 only our broadband data access lines and choose another provider for internet service provider, or ISP, services.
24
From 2014 to 2016, we continued accelerating our high speed FTTx household coverage. We currently
offer various promotional packages to encourage more migration of our FTTx subscribers to higher speed FTTx service and migration of our ADSL subscribers to our FTTx service. In 2016, FTTx revenue reached 89.6% of our total broadband revenue. As of
December 31, 2016, 92.5% of our FTTx service customers subscribe HiNet ISP service.
Our subscriber market share of Taiwans
broadband market was approximately 76.7%, 75.8% and 74.3% in 2014, 2015 and 2016, respectively.
The following table sets forth our
broadband service customers as of each of the dates indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
FTTx service customers (in thousands)
|
|
|
3,120
|
|
|
|
3,358
|
|
|
|
3,484
|
|
ADSL service customers (in thousands)
|
|
|
1,419
|
|
|
|
1,138
|
|
|
|
992
|
|
Our FTTx service offers downlink speeds of 16, 35, 60, 100, 300, 500 Mbps and 1 gigabits per second, or Gbps,
matched with uplink speeds of 3, 6, 20, 40, 100, 250 and 600 Mbps, respectively. Our ADSL service offers downlink speeds that range from 2 Mbps to 8 Mbps and uplink speeds that range from 64 kilobits per second, or Kbps, to 640 Kbps.
We have experienced competition in broadband from cable operators and other fixed-line operators. In addition, as faster wireless
technologies, such as 4G LTE, have been deployed, some customers have replaced fixed broadband services with high-speed mobile broadband services. Our strategy is to continue the deployment of higher speed FTTx network so as to maintain our
competitiveness.
Charges for our FTTx and ADSL services include
one-time
installation charges and
monthly subscription fees. These charges for our FTTx and ADSL services vary based on connection speed. 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.
The following table sets forth our ARPU for each of the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
ARPU for broadband services per
month
(1)
|
|
|
704
|
|
|
|
714
|
|
|
|
717
|
|
ARPU for FTTx services per month
(2)
|
|
|
838
|
|
|
|
828
|
|
|
|
811
|
|
(1)
|
ARPU for our broadband services per month is calculated as the sum of (a) broadband access revenues for the relevant period divided by the average of the number of our broadband access customers on the first and
last days of the period divided by the number of months in the relevant period and (b) HiNet ISP service revenues divided by the average of the number of HiNet ISP service subscribers on the first and last days of the period divided by the
number of months in the relevant period.
|
(2)
|
ARPU for FTTx 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 access customers on the first and last days of the
period divided by the number of months in the relevant period and (b) HiNet FTTx ISP service revenues divided by the average of the number of HiNet FTTx ISP service subscribers on the first and last days of the period divided by the number of
months in the relevant period.
|
Despite tariff reductions mandated by the NCC, our overall broadband ARPU increased in 2015
and 2016, mainly due to our successful strategy in migration mentioned above. For more details of the NCCs mandatory tariff reduction, please see Item 5. Operating and Financial Review and ProspectsOverviewTariff
adjustments.
25
Leased Line ServicesLocal 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 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. As of December 31, 2014, 2015 and 2016, the total bandwidths of
local and domestic long distance lines leased to third parties were 1,359.1, 1,556.8 and 1,678.8 Gbps, respectively. The number increased from 2014 to 2016 mainly due to the increase in demand for the bandwidth of backbone network for 4G mobile
broadband services.
We continue to experience a decline in rental fees for all of our leased line products. We attribute the general
decline in rental fees since 2000 to a general migration toward broadband services and increased competition from other service providers constructing their own lines mentioned above. Our local and domestic long distance leased line services
revenues were NT$4.6 billion, NT$4.4 and NT$4.3 (US$0.1 billion) in 2014, 2015 and 2016, respectively. Although the bandwidth leased to third parties increased, the revenue decreased year over year mainly due to the decline in rental fees
described above.
Wi-Fi
Services
As of December 31, 2014, 2015 and 2016, we had a total of approximately 2.0 million, 2.4 million and 2.6 million
residential and business customers that leased our access points, respectively. In addition, we had 60,000 hot spots in public areas by the end of 2016, such as convenience stores, airports and international convention centers, where our smartphone
subscribers can access our
Wi-Fi
network and help to offload mobile data network traffic.
MOD Services
Using video streaming technology through a set top box that connects to our FTTx and ADSL data connections, our MOD customers can
access TV programs,
video-on-demand
and other services. We had over 193 broadcasting channels and over 20,000 hours of
on-demand
programs and served approximately 1.3 million customers as of December 31, 2016. Also, as of December 31, 2016, we offered 160 high definition, or HD, channels and other HD
video-on-demand
programming, such as sports, movies and knowledge materials. In addition to our regular packaged offerings, we also offer SVoD services for film and drama. As of December 31, 2016, we had
1.3 million MOD customers, including 718 thousand SVOD subscribers. Our MOD revenues from 2014 to 2016 were NT$2.6 billion, NT$2.5 billion and NT$2.4 billion (US$72.7 million) in 2014, 2015 and 2016, respectively. The
decrease in revenue from 2014 to 2016 was mainly due to the adjustment of our cooperation schemes with channel providers starting from the third quarter of 2015. The new schemes bring down our operating expenses while also impacting our revenues at
the same time. We expect this structural shift to enhance our IPTV margins in the
mid-to-long
term.
ICT and Other Services
Our ICT
and other services in domestic fixed communications business include ICT services, corporate solution and bill handling services. See Emerging 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, tablets and data cards and ICT and other mobile services.
26
Mobile Services
We are Taiwans largest provider of mobile services in terms of both revenues and customers. In 2014, we generated revenues of
NT$77.5 billion, or 34.2% of our total revenues, from mobile services. In 2015, we generated revenues of NT$80.9 billion, or 34.9% of our total revenues, from mobile services. In 2016, we generated revenues of NT$78.8 billion (US$2.4
billion), or 34.3% of our total revenues, from mobile services. Our mobile VAS revenue grew by 13.8% from 2014 to 2015 and by 4.8% from 2015 to 2016 due to the launch of our 4G mobile broadband services in May 2015 and fast development in the 4G
mobile broadband segment in the industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions)
|
|
|
(in millions)
|
|
Mobile services revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Usage
(1)
|
|
|
36.0
|
|
|
|
35.8
|
|
|
|
33.0
|
|
|
|
1,018.9
|
|
Interconnection
|
|
|
4.8
|
|
|
|
3.7
|
|
|
|
2.7
|
|
|
|
83.7
|
|
Mobile VAS
|
|
|
34.8
|
|
|
|
39.6
|
|
|
|
41.5
|
|
|
|
1,280.8
|
|
Other
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
48.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mobile services
|
|
|
77.5
|
|
|
|
80.9
|
|
|
|
78.8
|
|
|
|
2,431.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes monthly fees.
|
Owing to the saturation and subscriber identification module card, or
SIM card, consolidation in the entire mobile market in Taiwan, we are facing the decrease in total number of customers in the market. However, we are still the largest mobile operator in Taiwan in terms of revenues and number of customers. We had
10.8 million mobile customers, for a market share of approximately 37.3% of total mobile customers and approximately 37.0% of total mobile services revenues in Taiwan, as of December 31, 2016.
In October 2013, we obtained a 4G mobile broadband services spectrum of 10 MHz paired spectrum in the 900 MHz frequency band and 25 MHz paired
spectrum in the 1800 MHz frequency band. In November 2013, we paid NT$39.1 billion to the government for the spectrum. The license is valid until December 31, 2030. We have launched 4G mobile broadband services in May 2014 and deployed our
4G mobile broadband networks for better coverage. By the end of 2015, our 4G mobile broadband network population coverage had reached 99% for the whole country.
In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired spectrum in the 2500MHz and 2600MHz
frequency bands, and we paid NT$10.0 billion to the government in the same month. The license is valid until December 31, 2033. We put these 2500MHz and 2600MHz frequency bands into use on March 24, 2016. We will continue enhancing
our 4G mobile broadband network capacity.
In February 2002, the MOTC 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. See the detail in
mobile spectrum allocation in Network Infrastructure. The NCC plans to
re-auction
this spectrum in the second half of 2017. Meanwhile, our 2G service license will expire in June 2017, and we will
cease our 2G service upon the expiration of the license.
We offer the largest international roaming network among Taiwan mobile service
providers. By the end of 2016, our 3G roaming contracts includes 385 networks in 149 countries, our 2G GSM roaming contracts include 469 networks in 197 countries, and our 2.5G GPRS roaming contracts include 411 networks in 158 countries. We have
also established 4G LTE roaming contracts with 106 networks in 57 countries.
27
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
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Taiwan population (in thousands)
(1)
|
|
|
23,434
|
|
|
|
23,492
|
|
|
|
23,540
|
|
Total mobile revenues in Taiwan (in
billions)
(2)
|
|
|
NT$207.6
|
|
|
|
NT$217.1
|
|
|
|
NT$211.9
|
|
Annualized churn rate
(3)
|
|
|
13.61
|
%
|
|
|
18.17
|
%
|
|
|
22.80
|
%
|
Minutes of usage (in millions of minutes):
|
|
|
|
|
|
|
|
|
|
|
|
|
Incoming
|
|
|
12,043
|
|
|
|
11,428
|
|
|
|
9,953
|
|
Outgoing
|
|
|
12,243
|
|
|
|
11,626
|
|
|
|
10,245
|
|
Average minutes of usage per user per
month
(4)(5)
|
|
|
186
|
|
|
|
172
|
|
|
|
153
|
|
(1)
|
Data from the Department of Population, Ministry of the Interior, ROC.
|
(2)
|
Data from the statistical monthly release by the NCC, in the ROC, which include mobile revenues from 2G, 3G, 4G mobile broadband and personal handy-phone system, or PHS, services.
|
(3)
|
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. The calculation includes both prepaid and postpaid customers.
|
(4)
|
The number of mobile customers is based on the number of SIM cards. The total number of mobile customers in Taiwan included 2G, 3G, 4G mobile broadband, PHS, prepaid card and VPN customers.
|
(5)
|
Average minutes of use per user per month is calculated by dividing the total minutes of use 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.
|
The total mobile customers in Taiwan had reached approximately
28.9 million as of December 31, 2016. Mobile penetration was approximately 122.9% on the same date. The overall mobile services market experienced a slight decrease of 2.4% in revenues in 2016 mainly due to the decrease in total number of
customers in the mobile market. As of December 31, 2016, we had 6.7 million, 3.8 million and 0.3 million subscribers for 4G, 3G and 2G services, respectively.
We began offering prepaid card services in October 2000, prepaid 3G card services in February 2008, and prepaid 4G card services in April
2015. As of December 31, 2016, we had approximately 1.6 million prepaid customers, representing approximately 15.0% 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.
Our tariffs for post-paid mobile customers primarily consist of usage
fees and monthly fees. We also offer discounts on usage fees for calls made between our mobile customers to encourage subscription to our mobile service.
When our customers are outside Taiwan, they pay roaming charges plus international long distance charges and, where applicable, local charges
in roaming destinations. We have already signed agreements with some providers in foreign countries for strategic cooperation for our roaming business.
Our ARPU per month increased to NT$604 in 2015 from NT$593 in 2014, primarily due to successful 4G mobile broadband migration which attracted
additional mobile internet subscribers. Our ARPU per month decreased to NT$598 in 2016 from NT$604 in 2015, primarily because we were focusing on gaining customers who are more price-sensitive to our 4G mobile broadband services in 2016.
In addition to our basic mobile services, we also offer a broad range of value-added telecommunications and information services. Revenues
from mobile VAS represented 44.9%, 49.0% and 52.7% of our total mobile services revenues in 2014, 2015 and 2016, respectively. The increase of mobile VAS revenue percentage was mainly attributed to the increase in mobile data plan subscriber number.
28
Sales of Mobile Handsets, Tablets and Data Cards
We engage in the distribution and sales of mobile handsets, tablets and data cards for use on our mobile network to customers through our
directly-owned stores, our subsidiary Senao, and also through third-party retailers. See Marketing StrategyDistribution Channels and Sales and Distribution in Marketing, Sales and Distribution.
ICT and Other Services
Our ICT
and other services in our mobile communications business include ICT services, corporate solution and bill handling services. See Emerging Services.
Internet Business
Our internet business
includes data communication services, application VAS and services provided to the government. Our revenues from internet business represented 11.5%, 11.1% and 12.2% of our revenues in 2014, 2015 and 2016, respectively. In 2016, our revenues from
internet business as a percentage of our revenues increased mainly due to the increase in revenues generated from services such as IDC, cloud computing, information security and IoT, and some increases generated from the growth in HiNet and HiLink
services.
Data Communication
Our data communication service includes HiNet, our brand name as an ISP, and HiLink, a VPN service for enterprises. The following table sets
forth HiNets subscribers as of each of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Total internet subscribers in Taiwan
|
|
|
6,178
|
|
|
|
6,151
|
|
|
|
6,099
|
|
HiNet subscribers:
|
|
|
|
|
|
|
|
|
|
|
|
|
HiNet FTTx subscribers
|
|
|
2,843
|
|
|
|
3,083
|
|
|
|
3,221
|
|
HiNet ADSL subscribers
|
|
|
948
|
|
|
|
688
|
|
|
|
539
|
|
HiNet
dial-up
subscribers
|
|
|
439
|
|
|
|
426
|
|
|
|
413
|
|
Other access technology subscribers
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HiNet subscribers
|
|
|
4,233
|
|
|
|
4,199
|
|
|
|
4,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our ISP service subscribers decreased from 2014 to 2016 mainly due to substitution by mobile broadband
services and the competition from cable broadband operators. We are still the largest ISP in Taiwan, with a subscriber market share of 68.7% among 412 ISPs in ROC as of December 31, 2016. As of December 31, 2016, approximately 84.0% of our
broadband customers were also HiNet subscribers, using HiNet as their ISP. We expect the competitive conditions currently prevailing in the internet service provider market to continue to intensify.
Application VAS and Services Provided to the Government
Application VAS and services provided to the government includes services regarding to IDC, cloud computing, information security and IoT. See
Emerging Services. IDCs are facilities providing the physical environment necessary to keep computer network servers running at all times. These facilities are custom-designed with high-volume air conditioning temperature control
systems, secure access, reliable electricity supply and connections to high-bandwidth internet networks. Data center houses protect and maintain network server computers that store and deliver internet and other network content, such as web pages,
applications and data. We currently have the largest floor area of internet data centers in Taiwan compared to our competitors in Taiwan.
29
International Fixed Communications Business
Our international fixed communications business includes international long distance telephone services, international leased line services,
satellite services and ICT and other international services.
International Long Distance Telephone
We provide international long distance telephone services in Taiwan. Total revenues from international long distance telephone services
comprised 4.6%, 4.2% and 3.8% of our revenues in 2014, 2015 and 2016, respectively. In addition, we provide wholesale international long distance services to international simple resale operators that do not possess their own telephone network or
infrastructure. Our international long distance telephone revenues decreased by 7.5% to NT$9.6 billion in 2015, and further decreased by 8.5% to NT$8.8 billion (US$0.3 billion) in 2016, primarily due to the intense competition from
VoIP-based international long distance service providers and free VoIP applications. Our average market share of the international long distance market by minutes was approximately 56.0%, 57.8% and 55.8% in 2014, 2015 and 2016, respectively. Our
international long distance services consist primarily of international direct dial services and the wholesale of international long distance traffic.
International calls to our top five destinations represented 62.7% of our outgoing international long distance call traffic in 2016, including
Mainland China, Philippines, Indonesia, the United States and Hong Kong. International calls from our top five destinations represented 54.5% of our incoming international long distance call traffic in 2016, including Mainland China, Canada, the
United States, Japan and Indonesia.
The following table sets forth information with respect to usage of our international long distance
services for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in millions, except
incoming/outgoing ratio)
|
|
Incoming minutes
|
|
|
983
|
|
|
|
937
|
|
|
|
787
|
|
Outgoing minutes
|
|
|
1,658
|
|
|
|
1,346
|
|
|
|
1,022
|
|
Total minutes
|
|
|
2,641
|
|
|
|
2,283
|
|
|
|
1,809
|
|
Incoming/outgoing ratio
|
|
|
0.59
|
|
|
|
0.70
|
|
|
|
0.77
|
|
Total incoming call volume decreased by 4.7% from 2014 to 2015, and further decreased by 16.0% in 2016, mainly
due to the intensified market competition from VoIP-based international long distance service providers, free VoIP applications and other international long distance service providers. Similarly, due to this intensified competition, total outgoing
call volume decreased by 18.8% from 2014 to 2015 and further decreased by 24.1% in 2016.
Outgoing calls made by customers in Taiwan and
by customers from foreign destinations using Taiwan direct service are billed in accordance with our international long distance rate schedule for the destination called. Rates vary depending on the time of day at which a call is placed. Customers
are billed on a
six-second
unit basis for international direct dial services.
Average
international long distance usage charge per minute that we received for outgoing international calls was NT$4.4, NT$5.0 and NT$5.5 in 2014, 2015 and 2016, respectively. Average charge per minute increased 15.8%, 13.6% and 10.0% in 2014, 2015 and
2016, respectively, mainly due to our focus on expanding the wholesale of international long distance minutes in higher-unit-price areas, such as Central and South America, Africa, Asia and Middle East.
We pay for the use of networks of carriers in foreign destinations for outgoing international calls and receive payments from foreign carriers
for the use of our network for incoming international calls. Traditionally, these payments have been made pursuant to settlement arrangements under the general auspices of the International Telecommunications Union. Settlement payments are generally
denominated in U.S. dollars and are made on a net basis.
30
Leased Line ServicesInternational
We are a leading provider of international 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 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. Since August 2001, licenses have been awarded to four undersea cable operators to engage in leased line services. Demand for high-speed data transmission services has been growing rapidly, as a result of growing consumer demand and lower
tariffs due to increased competition. The total bandwidth of our lines leased increased by 39.2% from 2,009.6 Gbps in 2015 to 2,796.6 Gbps in 2016.
Rental fees for international long distance leased line are generally based on transmission speed and distance. We continue to experience a
decline in rental fees for international leased lines, partly as a result of competition from other international leased line service providers. In response, we continue to implement marketing and service campaigns to retain our high-value corporate
customers. Our international leased line services revenues were NT$1.5 billion, NT$1.7 billion and NT$1.8 billion (US$55.6 million) in 2014, 2015 and 2016, respectively, mainly due to our expansion to the overseas markets and growing
consumer demand mentioned above.
Satellite Services
We entered into a contract with
ST-2
Satellite Ventures Pte., Ltd. on March 12, 2010 to lease
capacity on the
ST-2
satellite. The lease term is 15 years starting from the official start of operations of the
ST-2
satellite, and the total contract value is
approximately NT$6.0 billion. This contract requires a prepayment of NT$3.1 billion, and the remaining amount will be paid annually. The
ST-2
telecommunications satellite launched on May 21,
2011 and began commercial operation in August 2011. Please refer to Note 40 of our consolidated financial statements included elsewhere in this annual report for further details.
In addition, we have two satellite communication centers that enable us to provide TV broadcast, satellite VAS and backup systems for use in
major emergencies. We also provide satellite services to Southeast Asia.
ICT and Other Services
Our ICT and other services in our international fixed communications business include corporate solution services. See Emerging
Services.
Others
Our other
business segment includes our
non-telecom
services, including electronic products sales made by our subsidiary, CHPT, and property sales made by our subsidiary, Light Era Development Co., Ltd., or Light Era.
Emerging Services
We continue
leveraging our advantages in network infrastructure and IDC to offer customized ICT total solutions to enterprise customers and to expand our ICT business. The revenues from our ICT business are classified in ICT and Other Services of
each business segment besides internet business. We are offering ICT total solutions by integrating our capabilities of cloud, information security, IoT and customization expertise. We are developing
in-house
Big Data capability for future commercialization as well as cooperating with partners to develop an IoT ecosystem across various industries.
31
Our ICT services includes integrated services such as our iEN, ITS, and Internet of Vehicles. Our
iEN service helps companies and corporations implement energy-saving measures through computer-driven data analysis. Our ITS service provides navigation, real-time traffic information and infotainment through mobile devices for cars and drivers. By
leveraging high speed 4G mobile broadband networks, we offer innovative Internet of Vehicles services including GPS, audio and video streaming, car information, etc. available for tablets. In addition to developing ICT businesses mentioned above, we
also pursue ICT projects from both public and private sectors aiming to expand our revenue streams.
A content delivery network, or CDN,
is a system of distributed servers that deliver webpages and other web content to a user based on the geographic locations of the user, the origin of the webpage and a content delivery server. This service is effective in speeding the delivery
of content of websites with high traffic. The closer the CDN server is to the user geographically, the faster the content will be delivered to the user. We provide CDN service to internet content providers to ensure stable quality when programs are
broadcasted.
Interconnection
We
provide interconnection of our fixed line network and mobile network with other operators.
The following table sets forth our
interconnection fee revenues and costs for the periods indicated. These revenues and costs are included, depending on the nature of the call made, in domestic fixed communications or mobile communications revenues and expenses, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions)
|
|
|
(in millions)
|
|
Interconnection fee revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed line
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
26.7
|
|
Mobile
|
|
|
4.8
|
|
|
|
3.7
|
|
|
|
2.7
|
|
|
|
83.7
|
|
Interconnection costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed line
|
|
|
3.3
|
|
|
|
2.3
|
|
|
|
1.6
|
|
|
|
48.5
|
|
Mobile
|
|
|
4.9
|
|
|
|
3.9
|
|
|
|
3.0
|
|
|
|
92.7
|
|
The interconnection rate between fixed-line customers and other fixed-line customers is NT$0.32 per minute
during peak times and NT$0.09 per minute during
off-peak
times. The interconnection rate for calls initiated by mobile customers to fixed-line customers is NT$0.4851 per minute during peak times and NT$0.2531
per minute during
off-peak
times.
The NCC has mandated mobile interconnection rate reduction over
a period of four years starting on January 5, 2013. The rate should be reduced from NT$2.15 per minute to NT$1.15 per minute in four years with a CAGR of
-14.5%.
Therefore, our mobile interconnection
revenues and costs decreased from 2014 to 2016.
Before January 1, 2011, the rates of telecommunication fees for telephone calls
between fixed-line customers and mobile customers were set by the mobile network operators: mobile network operators collected such telecommunication fees from customers and paid the fixed-line network operators interconnection fees based on usage,
regardless of which party of the interconnection initiated the call. Starting from January 1, 2011, the fixed-line network operators that initiate the call have the right to set the rates of telecommunication fees and to collect such fees from
customers for
fixed-line-to-mobile
calls; fixed-line network operators have to pay interconnection fees to mobile network operators in accordance with the
interconnection rate set forth by the NCC. In addition, to balance the competition between us, the market leader of fixed-line network operators, and other mobile network operators, we are also required by the NCC to pay transition fees (in addition
to the interconnection fees) to the other mobile network operators for a period of six years starting from January 1, 2011. The transition fees will decrease gradually over the
six-year
period, and we are
not required to pay such transition fees from January 1, 2017.
32
Fixed interconnection costs decreased from 2014 to 2016 mainly due to (1) decreasing
transition fees year over year, (2) reduction of mobile interconnection rate for
fixed-line-to-mobile
calls, and (3) decreasing traffic volume.
In accordance with governmental regulations, the contracts governing our interconnection arrangements must specifically address a number of
prescribed issues. For example, our interconnection charge should reflect our costs with respect to the network elements used. In addition, cost increases are subject to approval by the regulatory authorities. We expect that our interconnection
contracts will generally be reviewed annually, although we may also enter into long-term contracts. See RegulationTelecommunications ActInterconnection Arrangements.
Marketing, Sales and Distribution
Marketing
Strategy
In order to retain and expand our large customer base and to encourage our customers to increase their use of our
services and products, we continue to focus our marketing strategy on the following areas.
|
|
|
Services, Products and Bundled Offerings. We continually develop new VAS and products, and bundle our services and products based on different market segments, with the aim of increasing our high-usage customers and
enhancing customer loyalty.
|
|
|
|
Pricing and Promotions. We design flexible pricing packages that allow customers to select, and design special promotional packages to encourage usage.
|
|
|
|
Distribution Channels. We seek to broaden our distribution reach by strengthening our cross-industry alliances and marketing relationships. Furthermore, to expand our sales channels more effectively, we also implement
an external sales agent system by collaborating with Senao, Synnex Technology International Corporation and Tsann Kuen Trans-Nation Group, which collaborations enable us to get closer to every customer.
|
|
|
|
Business Customers. We devote a project manager or project engineer to serve corporate customers. These account managers are responsible for developing customized solutions and tariff packages to meet the specific needs
of our customers. We continually update and expand our service offerings so that we can remain a
one-stop
telecommunications services provider to our corporate customers and provide for all of their
telecommunications needs. We also use our data bank to identify and target potential clients for promoting our
e-commerce
and mobile services. In addition, we help our corporate customers improve their
efficiency and competitiveness by creating information systems for them.
|
|
|
|
Advertising. We are committed to further strengthening the Chunghwa Telecom brand and image as well as strengthening and expanding market recognition of our specialized product brands, such as HiNet and emome. We plan
to leverage our leading market position and status to strengthen the overall advantage of our product brands.
|
Sales and Distribution
As of December 31, 2016, we had 17 operations offices for operations, 463 service centers and 6 customer service call centers
for sales and customer service.
We also had 279 Senao exclusive service stores as of December 31, 2016. In January 2007, we acquired
31.33% equity ownership of Senao, a major distributor of mobile handsets in Taiwan. Senao has been listed on the TWSE under the number 2450 since May 2001. Our equity ownership in Senao decreased from 31.33% as of January 15, 2007
to 29.31% as of March 31, 2017. Our investment in Senao enhanced our mobile handset distribution and sales capabilities. Our customers can subscribe for our broadband service, MOD service and other services at Senao retail stores. See
Item 7. Major Stockholders and Related Party TransactionsB. Related Party Transactions for a discussion of the agreement between the parent company and Senao about our business cooperation.
33
Competition
We face competition in virtually all aspects of our business.
Domestic Fixed Communications
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Local and domestic long distance telephone services: Revenue from local and domestic long distance telephone service of telecommunication services providers has continuously decreased in the past years primarily due to
mobile and VoIP substitution. Competition from mobile data service providers increased significantly due to the popularity of smart mobile devices and mobile applications such as LINE and WeChat. Although there are other providers of fixed
communications, including TWM Broadband, New Century Infocomm Tech. Co., Ltd. and Asia Pacific Telecom Co., Ltd., or APTG, competition from these providers was not significant in the past few years.
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Leased line services: Major competitors in this field are four fixed line operators including TWM Broadband, New Century Infocomm Tech. Co., Ltd., APTG and Taiwan Optical Platform Co., Ltd. The leased line services
providers primarily compete on the basis of price and the bandwidth speed of services.
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Broadband access services: Major competitors in this field are five multiple-system operators, or MSOs, including Kbro Co., Ltd., China Network Systems Co., Ltd., TWM Broadband, Taiwan Broadband Communication Co., Ltd.
and Taiwan Optical Platform Co., Ltd., and one fiber broadband service provider, namely Taiwan Intelligent Fiber Optic Network. With the increasing speed of mobile data service, we also face fierce competition from mobile data providers. The
broadband access service providers primarily compete on the basis of price and the bandwidth speed of services.
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MOD services: Major competitors in this field include five cable TV MSOs and 28 independent MSOs. The different service providers compete on the basis of the multimedia content offered along with the ability to offer
converged services by offering comprehensive solutions including data communications, voice communications and multimedia content.
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Mobile Communications
There are
five mobile operators in Taiwan, including Chunghwa Telecom, Taiwan Mobile, Far EasTone, Taiwan Star Telecom Corporation Ltd., or
T-Star,
and APTG. All of these five operators have 4G mobile broadband
licenses. In addition to the big three,
T-Star
and APTG underwent mergers and acquisitions in order to compete in the market for 4G mobile broadband services.
T-Star
merged with VIBO Telecom Inc., a former 3G operator, in October 2014, while APTG merged with Ambit Corporation, one of the 4G mobile broadband license winners, in December 2015, with APTG as the surviving company. Each 4G mobile broadband network
operator has been providing promotional programs to attract consumers, including unlimited data plans. In addition to the 2G, 3G and 4G mobile network operators discussed above, First International Telecom used to operate a personal handy-phone
network but was declared bankrupt by the Taiwan Taipei District Court on December 26, 2014, and discontinued operations on March 31, 2015.
In addition to the mobile network operators, the NCC has issued a total of 14 mobile virtual network operator, or MVNO, licenses, which allow
operators without a spectrum allocation to provide 3G mobile services by leasing the capacity and facilities of a mobile service network from a licensed mobile service provider. We are currently cooperating with Carrefour Telecom Co., Ltd. We may
cooperate with other mobile virtual network operators in the future.
As of the end of 2016, there were no WiMAX service providers in
Taiwan. The NCC has already recalled and released the 2500MHz and 2600MHz frequency band spectrum for 4G mobile broadband services through a bidding process in December 2015. We compete in the wireless services market primarily on the basis of
premium brand, price, quality of service, network reliability and attractiveness of service packages.
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Internet
Our primary competitors in internet services are other internet services providers, including SeedNet and TWM Broadband. We compete in the
internet services market primarily on the basis of price, technology, speed of transmission, amount of bandwidth available for use, network coverage and VAS.
International Fixed Communications
Our major competitors are TWM Broadband, New Century Infocomm Tech. Co., Ltd. and APTG, which have provided fixed-line services since June
2001. These operators are primarily focused on international long distance services and corporate customer services, which typically generate higher revenue than residential customers.
There have been four submarine cable services licenses granted since August 2001. These submarine cable operators, including East Asia Network
Inc., Reach Cable Networks Limited, Taiwan International Gateway Corporation and FLAG Telecom Taiwan Services Limited, offer international leased line services to other fixed-line operators, internet service providers and ISR operators.
Our international long distance services compete with international long distance resale services and VoIP services such as those provided by
Line and Skype.
Emerging Services
Our major competitors in ICT services are system integration service providers, including HwaCom Systems Inc., MiTAC Information Technology
Corp., NEC Taiwan Ltd., Acer Incorporated, Tatung Company, SYSTEX Corporation and SYSCOM Group.
Customer Service and Billing
We believe that our reputation of offering high-qualified customer services has enhanced our customers loyalty and helped us attract new
customers. We regularly survey our customers demands and preferences to develop new products and services accordingly.
We provide
convenient services to our customers as follows:
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24-hour
customer service and technical support through our service centers, call centers and website;
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bill payment services at
24-hour
convenience stores, bank service counters, automatic teller machines, and our service centers throughout Taiwan, via direct debit, over the phone,
online at our website (www.cht.com.tw), and on mobile handset emome or Hami;
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online information and bill payment services at our website (www.cht.com.tw) and customer service hotline for telephone payment;
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free of charge itemized billing statements; and
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consolidated and automated billing for all services, including English billing documents available upon request.
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Network Infrastructure
Our network infrastructure consists of transmission networks that convey voice and data traffic, switching networks that route traffic between
networks, and mobile, internet, leased line and data switching networks.
We purchase most of our network equipment from well-known
international suppliers. As part of the purchase contract, these suppliers deliver and install the equipment for us. We also purchase from local suppliers a variety of components such as transmission lines, switches, telephone sets, MOD
set-top
boxes, and radio transmitters.
Approximately 13,195 of our employees were engaged in network
infrastructure development, maintenance, operations and planning as of December 31, 2016.
Transmission Networks
As of December 31, 2016, our transmission networks consisted of approximately 2.43 million fiber kilometers of fiber optic cable for
trunking and approximately 9.01 million fiber kilometers of fiber optic cable for local loop.
Between 2009 and 2013, we deployed
next generation synchronous digital hierarchy, or NG SDH, and optical cross connect, or OXC, equipment for providing TDM and data service. Due to the emergence of packet-transport network, or PTN, technology, which is a cost-effective method for
transmitting packet-based data services, we began the deployment of PTN and stopped the deployment of NG SDH network in 2014. Between 2007 and 2014, we deployed
40/80-wavelength
Re-configurable
Optical
Add-Drop
Multiplexer, or ROADM, for backbone transmission network in order to provide new data services such as gigabit Ethernet, fiber channel,
2.5 gigabit and 10 gigabit packet over SDH and 10 gigabit Ethernet. Due to the high utilization of our existing ROADM network, we began to introduce the optical transport network, or OTN, trial network to meet the demand of 100G wavelength services
in 2014. Between 2009 and 2013, we had already completed the deployment of 5,519 GbE OXC/NG SDH, which was stopped in 2014 due to the introduction of PTN. Between 2007 and 2015, we had already completed the deployment of 1,190 wavelength ROADM,
which was also stopped in 2016 due to the deployment of OTN. In addition, we had completed the deployment of 158 wavelength OTN and 7,460 GbE PTN by the end of 2016. We will have a trial of one wavelength 200Gbps transmission technology in 2017.
This trial will verify the scalability of the OTN to meet the explosive bandwidth demand.
As part of our strategic focuses on the
internet and data markets, our local loop connections mainly adopt FTTx technology. This enables us to provide broadband services, such as MOD, high speed internet access and VPN. As of December 31, 2016, we have constructed approximately
7.46 million FTTx ports. Our FTTx service can offer high-speed broadband internet access rates up to 1 Gbps. For low bandwidth demand, we use ADSL technology to provide the internet connection services for the customers.
Switching Networks
Domestic
telecommunications network.
Our domestic public switched telephone network currently consists of 19 message areas connected by a long distance network. As of December 31, 2016, we had 38 long distance exchanges, which are interconnection
points between our telecommunications network and approximately 16.8 million telephone lines, which reached virtually all homes and businesses in Taiwan.
We currently have intelligent networks installed over our public switched telephone networks for our domestic long distance and international
networks, as well as a local intelligent network in the Taipei, Taichung and Kaohsiung metropolitan areas. Our intelligent network is designed to facilitate the use of VAS by providing more information about calls and allowing greater management of
those calls.
As of December 31, 2016, our next generation network, or NGN core network capacity consisted of 1,160,000 local
telephone subscribers, comprising 448,000 Session Initiation Protocol-based, or
SIP-based,
and 712,000 Access Gateway-based, or
AG-based,
subscribers.
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Our NGN Managed IP backbone network consists of an inner core network and an outer core network.
We owned high-speed NGN Managed IP backbone network by the end of 2016 with 12 sets of 4Tbps/1.6Tbps switch routers for the inner core network and more than 34 sets of 4Tbps/1.6Tbps switch routers for the outer core network. The bandwidth of the
network is approximately 1,625 Gbps as of the end of 2016. We believe this network will enable us to meet the increasing demand for NGN services, such as VoIP, and all managed services, including MOD and VPN.
International network.
Our international transmission infrastructure consists of both submarine cable and satellite transmission
systems, which link our national network directly to 97 telecommunications service providers in 43 international destinations.
International calls are routed between Taiwan and international destinations through one of our two international switching centers, one
located in Taipei and the other in Kaohsiung. Each center had time-division multiplexing, or TDM, international gateway switches and NGN international gateway switch. We had a trunk capacity of 170,040 channels in total as of December 31, 2016.
As of December 31, 2016, we had invested in 20 submarine cables, 9 of which land in Taiwan. We had increased the capacity of each of
our current submarine cables, increasing our aggregate total capacity from 2,245 Gbps in 2015 to 4,025 Gbps in 2016.
Mobile Services Network
Our mobile services network consists of:
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cell sites, which are physical locations equipped with a base station consisting of transmitters, receivers and other equipment used to communicate through radio channels with customers mobile handsets within the
range of a cell;
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BSC (base station controllers) for GSM or RNC (radio network controller) for 3G, which connect to, and control, the base station within each cell site;
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cellular switching service centers for GSM or 3G, which control the base station controllers and the processing and routing of telephone calls;
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GGSN (gateway GPRS support nodes), which connect our GPRS network to the internet;
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SGSN (serving GPRS support nodes), which connect the GPRS network to the base station controllers;
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MME (mobility management entity), which connects the base station to our 4G core network that is responsible for control side;
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S GW (Serving Gateway), which connects the base stations to our 4G core network that is responsible for data side;
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PDN GW (Packet Data Network Gateway), which connects our 4G core network to the internet; and
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transmission lines, which link (i) with respect to the GSM/3G/4G network, the mobile switching service centers, MME, S GW, base station controllers, base stations and the public switched telephone network, and
(ii) with respect to the GPRS/4G core network, the base station controllers, the support nodes, PDN GW and the internet.
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We provide 2G mobile services based on the GSM network standards. Prior to October 22, 2014,
we had the 900 MHz and 1800 MHz frequency bands paired with spectrum of 15 MHz and 11.25 MHz, respectively, for our 2G mobile services and the licenses will expire in June 2017. Due to the gradual migration of the 2G subscribers to 3G and 4G, we
returned the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014 and transferred the spectrum of 900 MHz frequency band to 4G mobile broadband license. Our usage right of the 900 MHz frequency band is changed from 15 MHz
paired spectrum to 10 MHz paired spectrum since October 22, 2014, and the 10 MHz paired spectrum is shared by 2G GSM and 4G LTE networks adhering to the principle of technological neutrality of our 4G mobile broadband license. Since the launch
of our 3G and 4G mobile services, we have gradually migrated GSM subscribers to 3G and 4G networks and have consolidated our GSM network. The number of our 2G subscribers has decreased from 1.5 million as of December 31, 2014, to
0.3 million as of December 31, 2016.
We have 15 MHz paired spectrum in the 2.1 GHz frequency band for our 3G mobile services,
which was launched in July 2005 to provide voice communication services and 3G data services.
We have 10 MHz paired spectrum in the 900
MHz frequency band and 25 MHz paired spectrum in the 1800 MHz frequency band for our 4G mobile broadband services, which were launched in May 2014. In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired
spectrum in the 2500 MHz and 2600 MHz frequency bands. In March 2016, we implement three frequency band CA technology into our 900/1800/2600 MHz frequency band base stations that is expected to increase users downlink speed over 300 Mbps.
We have also installed an intelligent network on our existing mobile services network infrastructure, which enable us to provide additional
functions, such as prepaid and VPN services as well as a wide range of VAS.
Internet Network
HiNet, our internet service provider, has the largest internet access network in Taiwan, with 34 points of presence approximately 5,734,000
broadband remote access server ports and a backbone bandwidth of approximately 5,617 Gbps as of December 31, 2016. We aim to achieve HiNets points of presence and backbone bandwidth to approximately 6,617 Gbps by the end of 2017.
HiNets broadband backbone network consists of an inner core network and an outer core network. We had high-speed internet protocol
backbone network by the end of 2016 with 18 sets of 30Tbps /12.8Tbps/10.24Tbps/4.48Tbps/4Tbps/1.6Tbps switch routers for the inner core network and more than 50 sets of 5.28Tbps/4Tbps/2.64Tbps/1.6Tbps/640Gbps switch routers for the outer core
network. We also built CDN to meet the needs of Internet/OTT services. Our CDN consists of 12 domestic and five overseas
point-of-presences
and the total capacity is
approximately 287 Gbps. We believe these networks will enable us to meet the increasing demand for our internet services.
HiNets
total international connection bandwidth is 1,037 Gbps as of December 31, 2016. As we expect that internet traffic flows to and from the United States will continue to increase, we have been continuously expanding our bandwidth to the United
States. We also endeavor to increase our links to other countries, including Japan, Korea, Hong Kong, Singapore, Mainland China, Malaysia and Thailand.
Leased Line and Data Switching Networks
We operate leased line networks on both a managed and unmanaged basis. In addition, we operate a number of switched digital networks used
principally for the provision of packet-switched, frame relay, asynchronous transfer mode technology and a multi-protocol label switching internet protocol VPN. As of December 31, 2016, we had 335 frame relay ports, 884 asynchronous transfer
mode ports and approximately 97,573 multi-protocol label switching internet protocol VPN virtual ports.
Our data networks support a
variety of transmission technologies, including frame relay, asynchronous transfer mode and ethernet technology. We have also built up our HiLink VPN that combines internet protocol and asynchronous transfer mode technologies. The advantage of
HiLink VPN based on multi-protocol label switching technology is that it can carry different classes of services, such as video, voice and data together to provide services with various qualities of service, high performance transmission and fast
forward solution in an enhanced security network. HiLink VPN can be accessed by
xDSL/FTTx/NG-SDH
and can include
built-in
mechanisms that can deal with overlapping
internet protocol addresses. Therefore, the network potentially is less costly and requires less management for business applications.
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Cybersecurity and Personal Information Protection
To prevent increasing cyber risks and threats, we have implemented the measures described below.
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We have built an online service system that enables Certificate Authoritys Secure Socket Layer functions that performs as a secure tunnel to transmit encrypted customers information. In addition, we offered
the Global Trust Secure Site Seal to prevent from phishing attacks on payment web sites.
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The high-availability systems in our data centers deploy firewall and Intrusion Prevention System, or IPS, to defend against hackers attacks.
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All information systems and websites are scanned for vulnerabilities and a team of information security experts is responsible for conducting penetration testing on our information system, websites and Apps, to prevent
leakage of customer information.
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We have enhanced the firewall policy and adopted minimum principle to limit the IPs and ports access control, in order to reduce intrusion risk from hackers.
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We have enhanced our system access controls including, among other measures, by using
two-factor
authentication and by limiting daily operational access to dedicated terminals in
a separate network.
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We have enhanced the retention and monitoring for all system, database, and applications logs as an additional information security measure and our managers review system logs and inquiry records on a daily basis.
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We required our branch offices to comply with ISO27001 and obtain the ISO27001 certification.
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We established CHT Security Operation Center, or SOC, which is responsible for incidents and threats monitoring, notification and emergency response.
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To prevent harm on personality rights, the Personal Information Protection Act, or PIPA, governs all the collection, processing and use of
personal information, and it applies to all individuals, legal entities, and enterprises. We have conducted inventory checks of personal information that we currently hold, established standard operating procedures, or SOP, to comply with the
requirements under PIPA, and have taken information security measures to protect the data.
To comply with the PIPA, we implemented a
series of measures to avoid the leakage of customers information:
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Personal information protection policies and regulations are defined in the operational rules of all of our business and service contracts.
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According to our personal data safety and awareness plan, all of our employees are required to take training programs and to pass the awareness test once a year.
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We required our branch offices to implement a drill in personal data leakage incident handling once a year.
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Our auditing department completes an annual audit plan and regularly audits information circulation in each department on customer information management and protection.
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We enforced customer service center and call center to comply with BS10012 and obtain the BS10012 certification.
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Documents containing customers personal information are labeled highly confidential.
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Property, plant and equipment
Our property, plant and equipment consist mainly of telecommunications equipment, land and buildings located throughout Taiwan. Although we
have a significant amount of land and buildings throughout Taiwan, most of our properties are for operational use and only a small part of them are for investment purposes, which were classified as investment properties in our
consolidated financial statements included in this annual report. Notes 17 and 18 to our consolidated financial statements, included elsewhere in this annual report, provide additional details as to our Property, plant and equipment and
Investment properties, respectively. See Item 3. Key InformationD. Risk FactorsOur ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural
disasters for a discussion of environmental issues that may affect utilization of our assets.
We are now focusing more on rental
income and will continue seeking development opportunities from the ROC central and local government urban planning programs to increase the value of our land, buildings and equipment. We have received approximately NT$605.4 million (US$18.7
million) in rental income from properties in 2016.
Insurance
We do not carry comprehensive insurance for our properties or any insurance for business disruptions. We do, however, maintain
in-transit
insurance for key materials, such as cables, equipment and equipment components. We do not carry insurance for the
ST-2
satellite since we only lease capacity for
our operations instead of owning the satellite.
Employees
Please refer to Item 6. Directors, Senior Management and EmployeesD. Employees for a discussion of our employees.
Our Pension Plans
Currently, we offer
two types of employee retirement plansour defined contributions plan and defined benefits planwhich are administered in accordance with the Republic of China Labor Standards Act and the Republic of China Labor Pension Act.
Legal Proceedings
From time to time, we
are involved in various legal and arbitration proceedings of a nature considered to be in the ordinary course of our business. It is our policy to provide for reserves related to these legal matters when it is probable that a liability has been
incurred and the amount is reasonably estimable. From time to time, we have also been assessed fines by various government agencies such as the NCC and FTC, but none of these fines have had a significant effect on our financial condition or results
of operations.
Except as disclosed in our annual report, we believe that we have not been involved in any legal or arbitration
proceedings during 2014, 2015 or 2016 that would have a significant effect on our financial condition or results of operations; however, we cannot give you any assurance with respect to the ultimate outcome of any asserted claims against us or legal
or arbitration proceedings involving us.
Capital Expenditures
See Item 5. Operating and Financial Review and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures for a
discussion of our capital expenditures.
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Enforceability of Judgments in Taiwan
We are a company limited by shares and incorporated under the ROC Company Act. All of our directors, executive officers and some of the experts
named in this annual report are residents of Taiwan and a substantial portion of our assets and the assets of those persons are located in Taiwan. As a result, it may not be possible for investors to effect service of process upon us or those
persons outside of Taiwan, or to enforce against them judgments obtained in courts outside of Taiwan. We have been advised by our ROC counsel that in their opinion any final judgment obtained against us in any court other than the courts of the ROC
in connection with any legal suit or proceeding arising out of or relating to the ADSs will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that:
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the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;
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the judgment and the court procedure resulting in the judgment are not contrary to the public order or good morals of the ROC;
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if the judgment was rendered by default by the court rendering the judgment, we, or the above mentioned persons, were duly served within a reasonable period of time in accordance with the laws and regulations of the
jurisdiction of the court or process was served on us with judicial assistance of the ROC; and
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judgments at the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis.
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A party seeking to enforce a foreign judgment in the ROC would be required to obtain foreign exchange approval from the Central Bank of the
ROC (Taiwan) for the payment out of Taiwan of any amounts recovered in connection with the judgment denominated in a currency other than NT dollars if a conversion from NT dollars to a foreign currency is involved.
Regulation
Overview
We were subject to the Statute of Chunghwa Telecom Co., Ltd. prior to our privatization. Although we have been privatized since August 2005,
the Statute of Chunghwa Telecom Co., Ltd. was still effective until December 24, 2014. The President of the ROC promulgated the abolishment of Statute of Chunghwa Telecom Co., Ltd. effective from December 24, 2014. The abolishment of the
Statute of Chunghwa Telecom Co., Ltd. did not and will not have any material impact on our company.
Regulatory Authorities
Prior to March 1, 2006, we were under the supervision of the MOTC and the Directorate General of Telecommunications. On March 1,
2006, the NCC was formed in accordance with the Organization Act, which was intended to transfer regulatory authority over the Taiwan telecommunications industry from the MOTC and the Directorate General of Telecommunications to the NCC.
Under the National Communications Commission Organization Act, or the Organization Act, the NCC was comprised of seven commissioners, which
are full-time positions. The premier of the Executive Yuan shall nominate the commissioners and appoint one of them to serve as chairperson, and one as vice chairperson. The nomination shall be approved and appointed by the Legislative Yuan. The
tenure of the commissioners is four years, and the commissioners may be
re-appointed
to serve a consecutive term. Accordingly, now there are seven commissioners, including the chairperson
Ting-I
Chan and the vice chairperson
Po-Tsung
Wong, both of them began serving on August 1, 2016.
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In accordance with the Organization Act, the NCC is responsible for:
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formulating, implementing and interpreting telecommunications laws and regulations;
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issuing telecommunications licenses and regulating the operation of telecommunications industry participants;
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assessing and testing telecommunication systems and equipment;
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drafting and promulgating technical standards for telecommunications and broadcasting;
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classifying and censoring the contents of telecommunications and broadcasting;
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managing telecommunications and media resources in Taiwan;
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maintaining competition order in the telecommunication and broadcasting industries;
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governing technical standards in connection with the safety of information communications;
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managing and facilitating the resolution of disputes pertaining to the Taiwan telecommunications and broadcasting industries;
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managing offshore matters relating to Taiwans telecommunications and broadcasting industries including matters of international cooperation;
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managing funds allocated for the development of Taiwans telecommunications and broadcasting industries;
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monitoring, investigating and determining matters in relating to Taiwans telecommunications and broadcasting industries;
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enforcing restrictions under telecommunications and broadcasting laws and punishing violators; and
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supervising other matters in relation to communications and media.
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Telecommunications Act
The Telecommunications Act and the regulations under the Telecommunications Act establish the framework and govern the various aspects of the
Taiwan telecommunications industry, including:
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licensing of telecommunications services;
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telecommunication numbers;
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restrictions on dominant telecommunications service providers;
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tariff control and price cap regulation;
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accounting separation system;
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interconnection arrangements;
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provision of universal services;
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Each of these aspects is described below. The Telecommunications Act
also establishes a
non-auction
pricing system for assignment of radio frequencies.
Licensing of Telecommunications Services
Type I and Type II Service Providers
Under the Telecommunications Act, telecommunications service providers are classified into two categories:
Type I
. Type I service providers are providers that install network infrastructure, such as network transmission,
switching and auxiliary equipment for the provision of telecommunications services. Type I services include fixed-line services such as local, domestic long distance and international long distance services, as well as interconnection, leased line,
ADSL and satellite services and wireless services such as mobile, including mobile data and trunked radio services.
Type II.
Type II service providers are defined as all telecommunications service providers other than Type I service
providers. Type II services are divided into special services and general services. Special services include simple voice resale, E.164 internet telephony service,
Non-E.164
internet telephony service,
international telecommunications services that provide to unspecific customers by leasing international circuit and other services specified by the MOTC before March 1, 2006 or by the NCC from March 1, 2006. General services include any
Type II service other than special services.
Until 1996, we were the sole provider of Type I services in Taiwan. In 1996,
the government opened the market for mobile, paging and trunked radio, mobile data and digital low power cordless telephone services. In 1998, the government opened the market for fixed-line and mobile satellite services. In June 2001, the
government granted licenses to three operators for establishing fixed-line services, thereby opening the market for fixed-line services. Since August 2000, the government has permitted four undersea cable operators to engage in the undersea cable
leased-circuit business.
Commencing in 2007, the NCC began accepting applications for licenses to provide fixed-line
services in March, June, September and December of each year. The NCC started to accept applications for fixed-line services on a daily basis beginning in 2008. There is no limit on the number of fixed-line licenses that they may decide to issue.
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Granting of Licenses
Type I
Type I service providers are more closely regulated than Type II service providers. The government has broad powers to limit
the number of providers and their business scope and to ensure that they meet their facilities
roll-out
obligations. Under the Telecommunications Act, Type I service providers are subject to
pre-licensing
merit review of their business plans and tariff rates.
Before
March 1, 2006, licenses for Type I services were granted by the MOTC through a three-step procedure. Applicants obtained a concession from the MOTC. After obtaining a concession, the applicant obtained a network construction permit and an
assignment of spectrum, in the case of mobile telephone services and satellite services, from the Directorate General of Telecommunications or the MOTC prior to applying for a license. Upon completion of construction of its network and review by the
Directorate General of Telecommunications, the applicant was granted a Type I license. The MOTC had the authority to grant Type I licenses for each of fixed-line services, wireless services and satellite services. Type I licenses have different
minimum
paid-in
capital requirements for applicants and varying durations depending on the particular type of service.
Since March 1, 2006, the same procedure applies except that the licenses are granted by the NCC.
The Telecommunications Act further authorizes the competent authority, now the NCC, to promulgate separate regulations
governing each Type I service, including the business scope of the Type I service provider, as well as the procedures and conditions for granting special permits and the length of the period of the special permits of each Type I service. Each holder
of a Type I license will pay a fee ranging from 0.5% to 2% of their annual revenues or their bid price ratio (Article 2 of the Type I Service Provider Special Tariff Standards) multiplied by their annual revenues generated from the particular Type I
service for which a license has been granted.
Fixed Line Services
. Under the Telecommunications Act, the
Regulations for Administration on Fixed Network Telecommunications Business govern the issuance of fixed-line service licenses and the business scope of fixed-line providers. Fixed-line service licenses are subdivided into the following categories,
and we conduct our fixed line services with a license for integrated services.
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integrated services, including local, domestic long distance and international long distance telephone services;
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local telephone services;
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domestic long distance telephone services;
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international long distance telephone services; and
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local, domestic long distance and international long distance leased line services.
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Licenses for local telephone and integrated services are valid for 25 years. Licenses for domestic long distance and
international long distance telephone services are valid for 20 years. Licenses for leased line services are valid for 15 years. If the service provider wishes to continue operating, the service provider needs to apply for a license renewal to the
NCC between nine months and six months before the expiration of their license. The minimum
paid-in
capital requirements for integrated services providers that applied for a license before June 30, 2004,
between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$21 billion, NT$8.4 billion and NT$6.4 billion, respectively. The minimum
paid-in
capital
requirements for both domestic and international long distance telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$1.05 billion and
NT$800 million, respectively. The minimum
paid-in
capital requirements for international undersea leased cable service providers that applied for a license before June 30, 2004, between July 1,
2004 and January 31, 2008, between February 1, 2008 and June 30, 2013 and on or after July 1, 2013 are NT$420 million, NT$420 million, NT$320 million, and NT$300 million, respectively. The minimum
paid-in
capital requirement for local telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$6.3 billion and
NT$4.8 billion, respectively, multiplied by the Local Network Operation Weights for the regions in which local network managerial rights have been granted to the service provider. The Local Network Operation Weights are calculated as the
population of the region as a proportion of the entire population of Taiwan and are announced by the competent authority every three years. If an applicant for a license is also a Type I service provider, it will need to combine the minimum
paid-in-capital
requirements for all relevant services.
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In March 2000, the government granted three new concessions to fixed-line
services providers for integrated services. Recipients of these concessions are required to apply for a network construction permit to deploy broadband local access networks. Each recipient of these concessions is required to have capacity for
150,000 customers before it is able to apply for a fixed-line license to launch its proposed services. The three fixed-line service providers have since obtained fixed-line licenses and are required to achieve capacity for one million customers by
the sixth year following the date of the grant of the network construction permit awarded. Operators that applied for integrated service provider licenses before June 30, 2004, between July 1, 2004 and January 31, 2008 and on or after
February 1, 2008 must achieve a capacity for 1.0 million, 0.4 million and 0.3 million customers, ports or a combination of both, respectively, by the fourth year following the date of the grant of the network construction permit.
Wireless Services
. Under the Telecommunications Act, the Regulations for Administration of Mobile Communications
Business promulgated by the MOTC before March 1, 2006 or by the NCC from March 1, 2006 continue to govern the issuance of wireless services licenses and the business scope of wireless service providers. Wireless service licenses are
subdivided into the following categories:
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digital
low-power
cordless telephone services; and
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trunked radio services.
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Wireless service licenses are granted to both regional
and national service providers through review and bidding procedures.
The wireless service license for mobile or paging
service, once granted, should be valid for a term of 15 years starting from the date when such license is granted, and licenses for mobile data, digital
low-power
cordless telephone and trunked radio are valid
for 10 years starting from the date when such license is granted. According to the Regulations for Administration of Mobile Communications Businesses amended by the NCC on September 19, 2011, the wireless service provider may file an
application with the NCC for extension of the valid term of its license for providing mobile or paging service one year prior to the expiry of the
15-year
valid term. Once the NCC approves the application, the
valid term of the wireless service license for mobile or paging service will be extended to June 30, 2017. The valid terms of our licenses granted by the ROC government authorities for providing 2G mobile services on the 900MHz and 1800MHz
spectrum expired in 2012 and 2013 respectively. We filed the application with the NCC for extending the valid terms of our 2G licenses on November 29, 2011. Our application was approved by the NCC in November 2012 and the terms of our licenses
for providing 2G mobile services on the 900MHz and 1800MHz spectrum should be valid until June 2017. See Item 4. Information on the CompanyB. Business OverviewNetwork InfrastructureMobile Services Network for the
discussion of our early return of the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014.
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The minimum
paid-in
capital requirements
for different mobile communication businesses are as follows: Digital
Low-Power
Wireless Telephone Business, NT$200 million; Trunking Wireless Telephone Business, NT$20 million for regional operation
and NT$60 million for island-wide operation; Mobile Data Communication Business, NT$50 million for regional operation and NT$150 million for island-wide operation; Radio Paging Business, NT$200 million for regional operation and
NT$400 million for island-wide operation; Mobile Telephone Business, NT$2 billion for regional operation and NT$6 billion for island-wide operation. If one single applicant acquires operational licenses of two or more businesses with
minimum
paid-in
capital requirements, the
paid-in
capital for the businesses should be calculated and collected by the applicant separately.
For an operator who obtains the permission of operation over two businesses through the legal procedure, its minimum
paid-in
capital shall be separately calculated upon approval for establishment, if such other businesses are subject to the minimum
paid-in
capital restriction.
Third Generation Mobile Services
. The MOTC promulgated the Regulations for Administration of the Third Generation
Mobile Communications Business on October 15, 2001. The NCC amended the above regulations on July 5, 2007, designating itself as the authority in charge of the third generation, or 3G, mobile services regulations and further amended such
regulations on December 30, 2008 for the establishment of base stations. The regulations govern voice and
non-voice
telecommunications services provided using the spectrum assigned by the MOTC, and now
governed by the NCC, that utilizes the
IMT-2000
technical standards as announced by the International Telecommunications Union. Licenses for 3G mobile services were granted by the MOTC and are now granted by
the NCC. We have received our 3G mobile services license, which is valid from May 26, 2005 to December 31, 2018.
Under the Regulations for Administration of the Third Generation Mobile Communications Business, the operation area of this
business is the whole nation; the minimal
paid-in
capital for operating this business shall be NT$6 billion. If the applicant operates another business of a Type I telecommunications enterprise at the
same time and there is a restriction on the
paid-in
capital to the other business, after acquiring the establishment approval, the required minimal
paid-in
capital shall
be calculated by aggregating the minimal requirement of each service.
Mobile Broadband Services.
Pursuant to the
Regulations for Administration of Mobile Broadband Businesses, the 4G mobile broadband service providers must obtain the concession license issued by the NCC before providing 4G mobile broadband services. The license granted for the application in
2013 is valid from the license issue date until December 31, 2030 and the license granted for the application in 2015 is valid from the license issue date until December 31, 2033. The operation area of 4G mobile broadband services covers
throughout the ROC.
The minimum
paid-in
capital for operating the mobile
broadband services is NT$6 billion. If an applicant also operates another business of Type I telecommunications enterprise, the minimal
paid-in
capital required for operating the mobile broadband services
and the other Type I telecommunications services shall be determined by aggregating the
paid-in
capital of the entity required for operating the mobile broadband services and that of the entity required for
operating the other Type I telecommunications services.
The mobile broadband services license was released for the first
time in 2013. We received the 4G mobile broadband services license on April 30, 2014, and launched the services on May 29, 2014. Mobile broadband services licenses were released for bidding for a second time in 2015, and we were declared
the winning bidder on December 7, 2015. After the revision of our 2500MHz and 2600MHz business plan was approved by the NCC on January 27, 2016, we received a permit for establishment by the NCC on February 17, 2016, in accordance
with such business plan, and now we are accelerating the deployment of 4G mobile broadband base stations with these frequency bands. We received the license to operate these frequency bands on March 23, 2016, and put these frequency bands into
use on March 24, 2016.
Satellite Services.
Under the Telecommunications Act, the Regulations for
Administration on Satellite Communication Services promulgated by the MOTC govern the issuance of satellite services licenses and the business scope of satellite service providers. The NCC amended the above regulations on July 20, 2007,
designating itself as the authority in charge of the Satellite Regulations. Satellite services licenses are subdivided into fixed satellite services licenses and mobile satellite services licenses.
46
The satellite services license should be valid for a term of 10 years starting
from the date when such license is granted. If the service provider wants to
re-new
its satellite services license before the expiry of the
10-year
term, such service
provider needs to file a renew application with the NCC within the period from 9 months to 6 months before the expiry date of the original satellite license. The valid term of the renewed satellite license will be 10 years. Minimum
paid-in
capital requirements for fixed satellite service providers and mobile satellite service providers are NT$100 million and NT$500 million, respectively. If an applicant applies to operate fixed
satellite services and mobile satellite services at the same time, its minimum
paid-in
capital should be calculated separately. The same also applies to an applicant who operates another business of Type I
telecommunications enterprise at the same time.
We currently hold a fixed satellite services license, valid from
December 10, 2008 to December 9, 2018.
Type II
The Telecommunications Act was amended in 1996 to open the market for all Type II services. Under the Regulations for
Administration on Type II Telecommunications Business, Type II services are divided into special services and general services. Special services include simple resale, network telephone service of E.164 and
non-E.164
user numbers (VoIP), international leased circuit and other services specified by governing authority. General services include any Type II service other than special services. The policy for
granting a Type II service license is as follows:
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there is no limit on the number of licenses to be issued;
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licenses were granted by the Directorate General of Telecommunications before March 1, 2006 and are now granted by the NCC; and
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no bidding procedure is required.
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We hold a license to operate all Type II
services. Type II service licenses issued before November 15, 2005 are valid for ten years and may be renewed by submitting an application within two months prior to the expiration date. Type II service licenses issued or renewed on or after
November 15, 2005 are valid for three years and may be renewed during the period commencing two months prior to the expiration date. There is no minimum
paid-in
capital requirement for Type II service
providers. Our license to operate Type II services is included in our license to operate integrated services, and is valid from July 29, 2000 to July 28, 2025.
Under the Type II Telecommunications Enterprise Permit Fee Schedule, operators of simple resale or network telephone services
of E.164 or
non-E.164
user numbers must pay an annual license fee equal to 1% of annual revenues generated from these services during the previous year. Type II service operators providing services other than
simple resale or network telephone services of E.164 or
non-E.164
user numbers must pay license fees ranging from NT$6,000 to NT$150,000 depending on their respective
paid-in
capital. For operators who operate over two or more businesses, their license fee shall be separately calculated but jointly collected. These regulations do not apply to integrated services providers
who are permitted to provide Type II services without additional Type II Licenses.
Telecommunications Numbers
According to the Telecommunications Act, numbering codes, subscriber numbers, identification numbers and other
telecommunication numbers will be distributed and managed by the NCC. These telecommunication numbers may not be used or changed without approval by the NCC. In order to maintain effective use of available telecommunication numbers, the
Telecommunications Act empowers the NCC to reallocate and retrieve assigned telecommunication numbers and to collect a usage fee for distributed telecommunication numbers. According to the Regulations for Usage Fees of Specific Telecommunications
Numbers, telecommunications service providers have to pay 70% of revenues collected from the auctioning off and selection of golden numbers and the standard usage rates for special identification numbers in use.
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Restrictions on Dominant Telecommunications Services Providers
Under the Telecommunications Act, the regulations governing dominant telecommunications services providers apply only to Type I
service providers. A Type I service provider is deemed to be dominant if it meets any of the following criteria and was declared by the MOTC or now the NCC as dominant:
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controls key basic telecommunications infrastructure;
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has dominant power over market price; or
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has more than a 25% market share in terms of customers or revenues.
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We have
been declared by the former competent authority MOTC as a dominant Type I service provider for fixed-line and GSM mobile services. On July 7, 2012, we have been classified as a dominant Type I service provider for 3G mobile services by the NCC.
Under the Telecommunications Act, a dominant Type I service provider must not engage in the following activities:
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directly or indirectly hinder a request for interconnection with its proprietary technology by other Type I service providers;
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refuse to release to other Type I service providers the calculation methods of its interconnection fees and other relevant materials;
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improperly determine, maintain or change its tariffs or means of services;
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reject, without due cause, a request for leasing network components by other Type I service providers;
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reject, without due cause, a request for leasing lines by other service providers or customers;
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reject, without due cause, a request for negotiation or testing by other service providers or customers;
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reject, without due cause, a request for negotiation for
co-location
by other service providers;
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discriminate, without due cause, against other service providers or customers; or
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abuse its position as a dominant provider, or engage in other unfair competition activities as determined by the regulatory authorities.
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In addition, a dominant Type I service provider is subject to special regulations limiting its tariff changes.
Tariff Control and Price Cap Regulation
In order to promote competition in the telecommunications market, and as part of the governments overall policy toward
deregulation, the Telecommunications Act was amended in 1999 to abolish the former rate of return system on tariff setting in favor of price cap regulation of Type I services.
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Under the Administrative Regulation Governing Tariffs of Type I
Telecommunications Enterprises, a dominant Type I service provider must submit its proposed adjustment in primary tariffs and promotional packages including primary tariffs to the NCC for approval at least 14 days prior to the date of the proposed
tariff changes and announce such change on media, website and business locations on the day after the NCC grants the approval. The tariff change will come into effect seven days after the announcement.
Primary tariffs include:
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for fixed line local telephone services: monthly fees, usage fees, monthly rental fees of leased lines, pay telephone usage fees and internet connection service fees;
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for fixed line domestic long distance telephone services: monthly rental fees of leased lines;
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for fixed line international long distance telephone services: leased line monthly rental fees;
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for wireless services, including 3G mobile services: monthly rental fees and the prepaid communication charges;
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the wholesale price enacted in accordance with this regulation; and
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other fees or tariffs announced by the NCC.
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In addition, a dominant Type I
service provider is required to set wholesale prices for the provision of its telecommunication services to other telecommunications enterprises. Factors affecting the determination and adjustments of the wholesale price include the establishment,
change, cancellation and connection fees. These telecommunication services and their suitable targets, all of which are subject to annual reviews by the NCC, include:
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interface circuits (local and long distance) between internet access service providers and customers for Type I and Type II service providers;
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interface circuits (local and long distance) between internet access service providers for Type I and Type II service providers that are internet access service providers;
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interconnection circuits between Type I service providers and between Type I and Type II service providers of international simple resale, or ISR, and E.164 VoIP services;
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DSL-family
(xDSL) circuits for fixed line service providers and internet service providers;
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other local and long distance data circuits for Type I and Type II service providers; and
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broadband internet interconnection for Type I and Type II service providers that are internet access service providers.
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The initial wholesale prices set by a dominant Type I service provider may be the retail price less fees and expenses which
need not be incurred, but shall not be higher than its promotional pricing. Changes in the wholesale price charged by a dominant Type I service provider may not be greater than (i) the retail price less fees and expenses which need not to be
incurred but not greater than the promotional pricing; or (ii) the annual growth rate of the consumer price index in Taiwan minus the constant set by the NCC, whichever is the lower. The Administrative Regulations Governing Tariffs of Type I
Telecommunications Enterprises further prohibits a dominant Type I service provider from practicing unfair competition against other telecommunications enterprises.
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In addition, changes in tariffs charged by dominant Type 1 service providers
(notwithstanding the type of their respective services) may not, in any event, be greater than the annual growth rate of the consumer price index in Taiwan adjusted by a set constant, which will be periodically determined and announced by the NCC.
For example, if:
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the annual growth rate of the consumer price index in Taiwan minus the set constant is positive, the increased percentage of tariffs must not exceed such positive figure;
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the annual growth rate of the consumer price index in Taiwan minus the set constant is negative, the decreased percentage of tariffs must be at least the absolute value of such negative figure, and the tariffs used in
the given year must not be higher than the decreased tariff; and
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the annual growth rate of the consumer price index in Taiwan minus the set constant equals to zero, no increase in tariffs is allowed to be made by any Type I service providers.
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On February 7, 2013, the NCC announced that effective from April 1, 2013 to March 31, 2017:
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the set constant to be applied to the tariff adjustment for the fixed line integrated services is 5.1749% and covers the following:
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dominant providers of local network services and long-distance network services in Type I service
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tariffs of the following:
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the monthly fee for fixed-line broadband access services (excluding FTTH and FTTB)
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wholesale prices of the following:
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the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers
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the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider
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the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1 telecommunication service provider; the monthly fee for
the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers
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the monthly fee for other local and domestic long distance leased lines
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the interconnection fee for internet bandwidth interconnection
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the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan, no increase in tariffs is allowed.
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On March 8, 2017, the NCC announced that effective from April 1, 2017 to March 31, 2020:
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the set constant to be applied to the tariff adjustment for the fixed line integrated services is 3.19% and covers the following:
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dominant providers of local network services and long-distance network services in Type I service
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tariffs of the following:
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the monthly fee for fixed-line broadband access services (excluding FTTH, FTTB, ADSL, and the services which downlink and uplink speeds both over 100 Mbps)
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the set constant to be applied to the tariff adjustment for the fixed line integrated services is 5.1749% and covers the following:
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dominant providers of local network services and long-distance network services in Type I service
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tariffs of the following:
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wholesale prices of the following:
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the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers
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the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider
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the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1 telecommunication service provider; the monthly fee for
the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers
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the monthly fee for other local and domestic long distance leased lines
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the interconnection fee for internet bandwidth interconnection
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the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan, no increase in tariffs is allowed.
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In comparison, all
non-dominant
Type I service providers are only required to fully
disclose and notify the public of their proposed tariff adjustments and promotional packages, through the media, websites, and at all business premises, in an appropriate manner, and to report to the NCC prior to the date of the proposed tariff
change, with respect to all tariffs.
Type II service providers are free to establish their own tariff schemes, but are
required to notify the NCC and the public upon adoption and upon any subsequent adjustments.
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Accounting Separation System
The Telecommunications Act requires that a Type I service provider, including one who concurrently offers Type II services,
separately calculate the profits and losses for its different services and prohibits any cross-subsidization among services that will impede fair competition.
Interconnection Arrangements
The Telecommunications Act requires all Type I service providers to allow other Type I service providers access to their
networks. It further requires Type I service providers, within three months upon request by the other Type I service provider, to reach an agreement on the relevant terms for the interconnection. Prices charged for interconnection must be based on
cost. If the parties fail to reach an agreement within three months, the NCC may, either at the request of the parties or on its own accord, arbitrates and determines the interconnection terms for the parties. The Telecommunications Act authorizes
the Directorate General of Telecommunications or, from March 1, 2006, the NCC to issue rules and regulations pertaining to interconnection.
The Regulations Governing Network Interconnection among Telecommunications Enterprises establishes the basis for determining
the interconnection charge of a dominant Type I service provider, which shall be reviewed every four years. The interconnection charge of a dominant Type I service provider shall be reviewed by the NCC in advance, and the NCC has the right to modify
the rate.
A dominant fixed-line service provider shall unbundle its network elements. The unbundled network elements
shall contain the following:
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local switch transmission equipment;
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toll switch transmission equipment;
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international switch transmission equipment;
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directory equipment and services; and
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signaling network equipment.
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Unless otherwise provided by the laws,
interconnection charge of the providers for mobile communications businesses and the 3G mobile communications business should be calculated based on the decrees issued by NCC. The foregoing shall apply, mutatis mutandis, to the calculation and
reviewing method of the interconnection charge of the dominant providers for fixed communication services.
Unbundled
network components of the providers for mobile communications businesses and the 3G mobile communications business include:
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mobile telecommunications trunks;
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mobile telecommunications base stations;
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controlling equipment of mobile telecommunications base stations;
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mobile telecommunications switch transmission equipment; and
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other items recognized by the NCC.
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The Regulations Governing Network
Interconnection among Telecommunications Enterprises specifies the charges for network interconnection among Type I service providers as follow:
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Before January 1, 2011, except for international communications, tariffs for communications between a mobile telecommunications network and a fixed-line network were collected from the call-originating subscribers
by the call-originating service provider pursuant to the tariff schedules set by the mobile communication service provider, and revenues or any uncollectible accounts from such tariffs went to the mobile service provider. However, from
January 1, 2011, although the tariffs shall still be paid by the call-originating subscribers, the tariff schedules are set by the call-originating network service provider, and revenues or any uncollectible accounts from such tariff shall go
to the call-originating service provider. During the transition period from January 1, 2011 to December 31, 2016, we, as a dominant Type I fixed-line service provider, shall pay extra transition fee in addition to access charges to the
mobile communications service providers.
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Tariffs for communications between mobile telecommunications networks shall be paid by the call-originating subscribers pursuant to the tariff schedules set by the call-originating service providers, and the revenues or
any uncollectible accounts from such tariffs shall go to the call-originating service providers.
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Tariffs for communications between fixed-line network will be determined by the following principles:
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tariffs for communications between the local telephone networks shall be paid by the call- originating subscribers pursuant to the tariff schedules set forth by the call-originating service providers, and revenues or
any uncollectible accounts from such tariffs shall be allocated to the call-originating service providers;
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tariff schedules for local telephone network subscribers using domestic long-distance telephone services shall be set by the domestic long-distance telephone service provider and tariffs shall be collected from local
telephone network subscribers using domestic long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the domestic long-distance telephone service providers; and
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tariff schedules for local telephone network subscribers using international long-distance telephone services shall be set by the international long-distance telephone service provider and collected from local telephone
network subscribers using international long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the international long-distance telephone service providers.
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Tariffs schedules for communications between satellite mobile networks and between satellite mobile networks and fixed-line communications networks or mobile communications networks shall both be set by the
call-originating service providers. Revenues or any uncollectible accounts from such the tariffs shall go to the call-originating service providers.
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Tariffs schedules for communications between the E. 164 VoIP networks provided by the Type I service providers and mobile telecommunications networks, or local telephone networks, or satellite mobile networks shall be
set by the call-originating service providers. Revenues or any uncollectible accounts from such tariffs shall go to the call-originating service providers.
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Bottleneck Facilities
Under the Telecommunications Act, when a Type I service provider cannot construct bottleneck facilities within a reasonable
period of time or substitute those facilities with other available technologies, it may request for
co-location
on a fee basis from the owner of the facilities located at the bottleneck of the relevant
telecommunications network. The owner of the facilities so requested may not reject these requests without due cause. The NCC has the authority to prescribe facilities as bottleneck facilities, and has prescribed bridges, tunnels,
lead-in
tubes and telecommunications chambers located within buildings and horizontal and vertical telecommunications cables and lines as bottleneck facilities in relation to fixed-line telecommunications networks.
The NCC, in an announcement on December 21, 2006, has defined local loop facilities as the bottleneck of the telecommunications network and amended the Administrative Rules for Network Interconnection Between Telecommunication
Service Providers in April 2007, providing that we, as a Type I service provider, can only charge other local telephone service providers at cost for local loop services. The rental tariff is derived from a cost basis and must be approved by the NCC
each year.
Spectrum Allocation
The MOTC is responsible for allocating all radio related frequencies primarily according to the standards set by the
International Telecommunications Union. The NCC is responsible for the licensing of operators to use these frequencies. The 900 MHz and 1,800 MHz frequency bands have been allocated for 2G mobile services and the licenses will be expired in June
2017. A total of 40 MHz of FDD spectrum around the 850 MHz frequency band and a total of 110 MHz of FDD spectrum around the 2.1 GHz band have been allocated for 3G mobile services, and the licenses will be expired in December 2018.
On October 30, 2013, NCC completed the bidding process for the spectrum to provide 4G mobile broadband services and a
total of 270MHz of FDD spectrum over 700MHz, 900MHz, and 1800MHz frequency bands have been assigned to six nominated bidders, including us, and the licenses will expire in December 2030. The spectrum for 4G mobile broadband services was released
adhering to the principle of technological neutrality. Mobile broadband services can be offered by HetNet, including the 4G network and the 2G network under this technology-neutral spectrum. On December 7, 2015, the NCC completed a second round
of bidding on 4G mobile broadband spectrum. A total of 190 MHz spectrum of the 2500 MHz and 2600 MHz frequency bands were assigned to four nominated bidders, Far EasTone,
T-Star,
APTG and us, and the licenses
will expire in December 2033.
Provision of Universal Services
Under the Telecommunications Act, a Type I service provider may be required by the NCC, previously the MOTC, to provide
universal telecommunications services in remote or unprofitable areas. These services include voice communication services, such as public phones, and data communication services, such as internet provision for libraries and public primary and
secondary schools. All Type I service providers and certain Type II service providers designated by the NCC, previously the MOTC, will be required to contribute a fixed portion of their annual revenues to a universal services fund. Such a fund will
be used to compensate for any losses, bad debts and management fees incurred by the relevant Type I service provider in providing the universal services. All providers of universal services cannot refuse any request for service, unless for
legitimate reasons, and cannot charge more than the predetermined tariffs.
Equal Access
As a result of the liberalization of Taiwans telecommunications industry, a Type I service provider, including a 3G
mobile services provider, a WiMax service operator and a mobile broadband services provider, is required to provide its customers with equal access to the domestic and international long distance telephone services provided by other service
providers. A Type I service provider may provide equal access through
pre-selection
or
call-by-call
selection. When a customer
makes a call using
call-by-call
selection, such customer has the option to select a service provider by dialing the network identification prefix assigned to the service
provider of his choice. This will result in the automatic selection of the preferred service provider for the provision of relevant telecommunication services. The
pre-selection
function allows any customer to
select in advance a long distance or international service provider of his or her choice. When such customer makes a call using this function, the communications network will automatically interconnect to the long distance or international network
previously selected by such customer.
54
Number Portability
According to the Telecommunications Act and the Regulations Governing Number Portability, Type I service providers shall
provide number portability service which enables customers to retain their existing local and toll free fixed-line telephone numbers or mobile phone numbers when they switch from the original Type I service provider to other Type I service
providers. Meanwhile, Type I service providers shall mutually grant each other number portability services on a reciprocal basis, and shall conform in accordance with the principle of impartiality and reasonableness, and shall not be discriminatory.
Under the regulation, we are required to provide number portability service for fixed-line customers in Taipei City,
Taipei County (now New Taipei City), Keelung City, Taichung City, Kaohsiung City and other areas where there are two or above fixed-line service providers. We have also provided number portability service for mobile communication customers since
October 15, 2005. Pursuant to the regulation, we shall compile and submit related information of number portability for the previous six months to NCC by January 10 and July 10 of each year.
Local Loop Unbundling
In December 2006, the NCC defined the local loop as facilities at the bottleneck of telecommunications networks in
accordance with the Regulations for Administration on Fixed Network Telecommunications Businesses. The NCC requires us to unbundle the local loops and allow other telecommunications operators to use these connections. The local loop or last mile
connections are the physical wire connections between the telephone exchanges central office to the customers premises usually owned by the incumbent telephone company. The NCC further amended the Regulations Governing Network
Interconnection among Telecommunications Enterprises in April 2007 which provides that we can only charge other local telephone service providers at cost for local loop services instead of on the basis of commercial negotiations.
Co-location
We have been declared by the governmental authority as a dominant Type I service provider for fixed-line, 2G and 3G services.
According to the Telecommunication Act, the Regulations for Administration on Fixed Network Telecommunications Business and the Regulations Governing Network Interconnection among Telecommunications Enterprises, if any other service provider
requests for
co-location,
we must negotiate with them, unless otherwise provided by laws or regulations.
Ownership Limitations
The laws of the ROC limit foreign ownership of our common shares. Prior to March 1, 2006, the MOTC, as the competent
authority under the March 1, 2006, the NCC replaced the MOTC as the competent authority under the Telecommunications Act pursuant to the Organization Law. On July 18, 2006, the MOTC and the NCC reached an agreement where the MOTC will have
the authority to adjust foreign ownership limits only after negotiations with the NCC. On June 14, 2007, we applied to both the NCC and the MOTC, asking for an increase in direct and indirect foreign ownership cap of our common shares. After
consultation with the NCC, the MOTC raised our foreign ownership cap of direct and indirect shareholdings from 49% to 55%. Our foreign ownership limitation of total direct shareholdings remained at 49%.
55
Fair Trade Act
The requirements and restrictions under the Telecommunication Act regarding price control, IP peering, equal access and accounting separation
regulates certain competitive activities among telecommunication industries and aims to reduce the occurrence of anti-competition activities.
By comparison to the Telecommunications Act, the Fair Trade Act, or the FTA, plays a more comprehensive role in regulating all matters
relating to competition between enterprises. The Fair Trade Act seeks to deter and prevent anti-competitive conduct by granting the Fair Trade Commissions powers to investigate and to impose penalties.
The Fair Trade Act is administered and enforced by the Fair Trade Commission, or the FTC, which has independent administration rights granted
to it under the Fair Trade Act and is empowered to impose disciplinary actions for fair trade matters. The Fair Trade Commission may initiate an investigation either on its own account in accordance with its discretion granted by the Fair Trade Act
or upon receipt of a complaint.
Regulation on Telecommunications Enterprise with Monopoly Status
The term monopoly used in the FTA refers to the circumstance where an enterprise conducts its business operation in
a relevant market without facing any competition or where an enterprise is able to dominate the relevant market and block competition in the market. If there are two or more enterprises within the same market that do not engage in any price
competition with each other, the whole group of
non-competing
enterprises should be deemed as a single monopoly enterprise in the market.
According to the FTA, an enterprise or a group of enterprises will not be considered as monopolistic enterprise(s) if none of
the following circumstances exists:
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the market share of the enterprise in a relevant market reaches
one-half
of the market;
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the combined market share of two enterprises in a relevant market reaches
two-thirds
of the market; and
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the combined market share of three enterprises in a relevant market reaches three-fourths of the market.
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If the market share of any respective enterprise does not reach
one-tenth
of the
relevant market or if the amount of the enterprises total sales in the preceding fiscal year is less than the amount which the authority announces, such enterprise shall not be considered as a monopolistic enterprise in the relevant market.
Notwithstanding the above, the FTC has the ultimate discretion to consider an enterprise as a monopolistic enterprise upon any other events evidencing such enterprises capability to affect the supply and demand in relevant market or eliminate
competition.
Under the FTA, any enterprise with monopoly status is prohibited from engaging in any of the following
activities:
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directly or indirectly, by using any unfair method to prevent any other enterprises from competing;
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improperly set, maintain or change the price for goods or the remuneration for services;
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forcing the enterprises trading counterpart to give preferential treatment without justification; or
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abusing its market power.
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56
According to the FTCs Explanation on Regulations Governing
Telecommunication Industry, a telecommunications enterprise with monopoly status is likely to be involved with the following activities regulated by the FTA: conducting predatory pricing, price squeezing, cross-subsidies, price discrimination,
blocking access to essential facilities, inappropriate preference or differential treatment and entering into long-term agreements to restrict the ability to change counterparties.
If the FTC finds an enterprise liable for violation of regulations governing monopoly, the FTC could impose a monetary fine of
not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total sales of the enterprise in the preceding fiscal year. The responsible
person of such enterprise may be sentenced to imprisonment of not more than three years.
Regulations on Combination Between
Telecommunications Enterprises
The term merger used in the FTA refers to any of the following
circumstances:
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where an enterprise and another enterprise are merged into one;
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where any enterprise holds or acquires more than
one-thirds
of total voting shares or capital of another enterprise;
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where any enterprise is assigned by or leases from another enterprise the whole or the major part of the business or properties of such other enterprise;
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where any enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latters business; or
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where any enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.
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If any merger between or among multiple enterprises falls within any of the following circumstances, a prior approval granted
by the FTC shall be required:
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as a result of the merger, the enterprise will own at least
one-third
of the total market share;
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there is any enterprise involved with the merger has
one-fourth
of the market share; or
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the aggregate sales amount for the preceding fiscal year of the enterprises and the entities controlled by or affiliated with such enterprise involved with the merger exceeds the threshold amount publicly announced by
the FTC from time to time.
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Once the telecommunications enterprise files the merger application with the
FTC, the FTC will evaluate the pros and cons of the merger by weighing the potential economic efficiency against the disadvantage of reduced competition. If the FTC finds the potential economic efficiency generated from the merger should be able to
offset the disadvantage of reduced competition caused, the FTC will grant the approval for the merger. Furthermore, the FTC may, when granting an approval, impose certain conditions or undertakings on the applicants to ensure that the overall
economic benefit to be generated from the merger outweighs the disadvantage of the reduction in competition.
Regulations on
Concerted Action (Cartel) in Telecommunication Industry
The term concerted action (cartel) as used in
the FTA means the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding, with any other competing enterprise, to jointly determine the price of goods or services, quantity, technology, products,
facilities, trading counterparts, or trading territory with respect to such goods and services, and thereby to restrict each others business activities. The FTC may assume a concerted action exists based on the market condition, the feature of
goods or services, cost and profit, and the economic feasibility for enterprises to conduct concerted action. Notwithstanding the above, the term concerted action as used in the FTA is limited to any concerted action at the same production and/or
marketing stage that would affect the market function of production, trade in goods, or supply and demand of services. Under the FTA, enterprises are prohibited from engaging in any concerted actions unless the FTC holds the concerted action may be
beneficial to overall economy and public interest.
57
According to the FTCs Explanation on Regulations Governing
Telecommunication Industry, a telecommunications enterprise may be able to involve with the following concerted actions: entering into common pricing agreement, restriction of output and market segregation, concerted refusal to deal, or entering
into agreement for exchange of information.
If the FTC finds an enterprise liable for violation of regulations governing
concerted action (cartel), the FTC could impose a monetary fine of not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total
sales of the enterprise in the preceding fiscal year. The responsible person of such enterprise may be sentenced to imprisonment of not more than three years.
Regulations on Unfair Competition in Telecommunication Industry
The FTA prohibits any enterprise from conducting any of the following activities that may restrict competition or impede fair
competition:
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forcing another enterprise to discontinue supply, purchase or other business transactions with a particular enterprise for the purpose of injuring such particular enterprise;
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treating another enterprise discriminatively without justification;
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preventing competitors from participating or engaging in competition by inducing customers with low price or other illegal inducements;
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forcing another enterprise to refrain from competing in price, or to take part in a merger, or a concerted action, or to perform vertical restrictions by coercion, inducement with interest, or other improper methods; or
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setting improper restrictions on its trading counterparts business activity as the condition to reach business engagement.
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According to the FTCs Explanation on Regulations Governing Telecommunication Industry, the telecommunications enterprise
may be involved with the following activities that may restrict competition or impede fair competition: conducting vertical trading restraint, boycott, discrimination, improper sales discount, sales with gift or lottery or
tie-in
sales.
If any enterprise violates the regulations governing unfair competition,
the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in addition, the FTC may assess upon such enterprise an administrative fine of not less than NT$100,000 nor
more than NT$50,000,000. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify
the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine of not less than NT$200,000 nor more than NT$100,000,000 until its ceasing therefrom,
rectifying its conduct or taking the necessary corrective action.
58
Regulations on the Representations or Symbol Used by Telecommunications Enterprise on Goods
or in Advertisement
The FTA prohibits any enterprise from making or using false or misleading representations or
symbol as to price, quantity, quality, content, production process, production date, valid period, method of use, purpose of use, place of origin, manufacturer, place of manufacturing, processor, place of processing on goods, or any items which
attract customers or in advertisements, or in any other way making known to the public.
If an enterprise violates the
applicable provisions under the FTA that prohibit false or misleading representations, the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in addition, the FTC may
assess upon such enterprise an administrative fine. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise
to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine until its ceasing therefrom, rectifying its conduct or
taking the necessary corrective action.
Other Regulations
In addition to the competitive activities expressly regulated by the FTA, the enterprise shall further be prohibited from
conducting any fraudulent activity or significantly unfair activity that may impact the trade order.
Administrative Fee Law and Public Road Law
According to the Administrative Fee Law, central and local governments, government agencies and schools are empowered to collect
administrative fees from us and other telecommunications services providers for the telecommunications facilities built on public roads and properties. Under the Administrative Fee Law, Urban Road Act and Local Road Act, road authorities of
municipal governments may collect usage fees from users of local roads, including us, for establishing lines along with the local roads. The fee schedule is set up in the Standard for Usage Fees of Local Roads.
Under the Public Road Law, administrative authorities of public roads may collect usage fees from the users of public roads. According to the
Rules Governing Collection of Usage Fees on Public Roads, the relevant collection agencies, including agencies designated by the MOTC and municipal governments, depending on the types of public roads, may collect usage fees from users, including us,
for establishing lines along with the public roads.
In addition, legislators proposed to amend Article 72 of the Public Road Law. The
draft of amendment includes stipulations that manhole and hand-hole covers shall be level with the pavement after establishment or repair. The difference shall be no more than 0.6 centimeters high, within a radius of three meters. Moreover, the
anti-slip test value in wet conditions shall be no less than 60 BPN, British Pendulum Test value. Such new stipulations might result in an increase in our operational costs. The amendment is currently reviewed by the Legislative Yuan, and there is
no clear indication as to when the amendment will be adopted, if at all.
Personal Data Protection
Under the Personal Information Protection Act, or PIPA, every individuals or governmental or
non-governmental
agencies, including us, should be subject to certain requirements and restrictions for collecting, processing or using personal data. The definition of personal data is extended to
cover a broad scope, including name, birthday, ID, special features, fingerprints, marriage status, family, education, occupation, medical records, medical history, generic information, sex life, health examination report, criminal records, contact
information, financial status, social activities, and any other data which is sufficient to directly or indirectly identify a specific person. If we fail to comply with the PIPA, we may be subject to serious punishment for civil claims, criminal
offenses and administrative liabilities: the ceiling of the aggregate compensation amount for damages payable in a single case will be up to NT$200 million or the actual value of loss arising from our violation provided the amount of actual
value of such loss is higher than NT$200 million; the defendant may be subject to an imprisonment of up to five years; and the penalty for administrative liabilities will be up to NT$500,000 for each violation, and may be imposed consecutively
if such violation continues.
59
Statute of Chunghwa Telecom Co., Ltd.
The Executive Yuan, on April 27, 2012, proposed a motion for the abolishment of the Statute of Chunghwa Telecom Co., Ltd. for legislative
approval. The Legislative Yuan formally approved the motion on December 9, 2014 and the President of the ROC pronounced the abolishment of the law effective from December 24, 2014. The abolishment has no material impact on our company.
C. Organizational Structure
Set
forth below is a diagram indicating our organization structure as of March 31, 2017.
D. Property, Plant and Equipment
Please refer to B. Business Overview for a discussion of our property, plant and equipment.
ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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None.
60
ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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You should read the following
discussion of our financial condition and results of operations together with the consolidated financial statements and the notes to such statements included in this annual report.
For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended December 31, 2016 have been
translated into U.S. dollar amounts using US$1.00=NT$32.40, set forth in the statistical release of the Federal Reserve Board on December 30, 2016. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount.
Overview
A number of recent and
expected future developments have had, and in the future may have, a material impact on our financial condition and results of operations. These developments include:
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changes in our revenue composition and sources of revenue growth;
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capital expenditures as a result of technological improvements and changes in our business;
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effect of adopting Taiwan IFRSs on our dividends and employee bonuses.
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Each of these
developments is discussed below.
Changes in our revenue composition and sources of revenue growth
Our domestic fixed communications business revenues are derived primarily from the provision of local, domestic long distance, broadband
access, leased line service, MOD, and other domestic services including ICT, cloud services, corporate solution services, billing handling services and the leasing of real estate properties. In addition, we also derive fixed-line revenues from
providing interconnection services to other carriers. Our revenues from mobile communications business are principally derived from the provision of mobile services, sales of mobile handsets, tablets and data cards and other mobile services. Our
revenues from internet business are generated principally from HiNet internet service, data communication services, internet VAS, internet data center, and other internet services including ICT and cloud services. Our revenues from international
fixed communications business are derived primarily from international long distance, international leased line, international data services, satellite services, and other international services. Our other revenues are principally derived from
non-telecom
services.
The table below sets forth the revenues from our principal lines of business as a
percentage of total revenues for the periods indicated.
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Year Ended December 31
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2014
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2015
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2016
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Revenues:
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Domestic fixed communications business
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31.8
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%
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31.3
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%
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31.6
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%
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Mobile communications business
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48.8
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49.6
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48.2
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Internet business
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11.5
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11.1
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12.2
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International fixed communications business
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6.8
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6.7
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6.3
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Others
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1.1
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1.3
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1.7
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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61
Our domestic fixed communications business has been an important source of revenue over the last
three years. We derive domestic fixed communications from the provision of FTTx and ADSL access services that provides customers with data access lines. The percentage of total revenues derived from domestic fixed communication decreased in 2015
mainly due to the decline of domestic long distance and local call service revenue because of mobile and VoIP substitution, and reductions in tariffs for FTTx and ADSL services. The percentage increased in 2016 mainly attributable to the increase in
ICT revenues, which was partially offset by the decline in domestic long distance and local call service revenue. We believe that domestic fixed communications business will continue to generate a significant portion of our revenues.
Revenues from our mobile communications business made a major contribution to our revenues over the last three years. We have experienced an
increase in revenues in 2015 generated by our mobile VAS due to the raise in mobile internet subscribers. In 2016, the percentage of total revenues derived from mobile communications business decreased mainly due to the decline in voice revenue and
revenue from our sales of mobile handsets, tablets and data cards, which was partially offset by the increase in mobile VAS revenue. We believe that our mobile communications business will continue to generate a significant portion of our revenues.
Our internet business was another important source of revenues over the last three years. We derived internet business revenues from the
provision of data communication services, application VAS and services provided to the government. The percentage of revenues from internet services within total revenues decreased from 2014 to 2015, mainly due to the decrease in revenue generated
from information services of the land administration system that we established for the Land Administration Department of local governments, and the decrease was primarily affected by the downturn in the property market. In 2016, the percentage of
revenues from internet services within total revenues increased mainly due to the increase in revenues generated from services such as IDC, cloud computing, information security and IoT, and some increases in revenues driven by the growth in HiNet
and HiLink services.
We derived our international fixed communications revenues mainly from international long distance telephone
services and international ICT services. Revenues from our international fixed communications business as a percentage of our total revenues decreased from 2014 to 2016, because our international long distance telephone services revenue continued to
decline due to VoIP substitution.
Our other revenues increased from 2014 to 2016, and the increase was mainly due to operating growth
derived from one of our subsidiaries, CHPT, a semiconductor testing company.
Tariff adjustments
We adjust our tariffs and offer promotional packages from time to time primarily in response to market conditions. We also from time to time
are required to adjust our pricing in line with domestic regulations.
On February 7, 2013, the NCC announced a plan for tariff
reductions in wholesale tariffs for IP peering and domestic leased line services, and in monthly fees for fixed-line broadband access services (excluding FTTH and FTTB) over a period of four years starting on April 1, 2013, which was subject to
a reduction by
D
CPI5.1749%, where
D
CPI is the year-over-year change of the consumer price index of previous year released by the Directorate-General of
Budget, Accounting and Statistics of the Executive Yuan. While mobile tariffs were not regulated in this round, according to the revised Administrative Rules for Network Interconnection, the mobile interconnection fees were reduced from the current
NT$2.15 per minute to NT$1.15 per minute, over the period of four years starting from January 5, 2013. On March 8, 2017, the NCC announced a new plan for tariff reductions effective from April 1 2017 to March 31, 2020. The reduction
plan applies to the wholesale tariffs for IP peering and domestic leased line services, which was subject to a reduction by
D
CPI5.1749%, and to the monthly fees for fixed-line broadband access
services (excluding FTTH, FTTB, ADSL, and the services which downlink and uplink speeds both over 100 Mbps), which was subject to a reduction by
D
CPI3.19%. The
D
CPI for 2016 that was used for the tariff reduction starting from April 1, 2017 was 1.40%. In response to the tariff reduction plan announced by the NCC and to further support the governments
policy with respect to the development of digital economy, we voluntarily adopted a more aggressive tariff reduction rate for our IP peering service. We do not expect such tariff reduction to have a material adverse impact on our results of
operations.
62
Besides mandatory tariff reduction mentioned above, we, from time to time, voluntarily
implemented tariff adjustments in our broadband and mobile businesses in the past few years to consolidate our market share.
Capital expenditures
as a result of technological improvements and changes in our business
In recent years, we have focused on modernizing and
upgrading our mobile services network and on developing our FTTx network, which enables transmission of digital information at a high bandwidth over fiber loops. Constructing fiber networks in new buildings and areas with demand for 500 Mbps and 1
Gbps is our priority. Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. We evaluate our investment opportunities by benchmarking them against
internal return requirements.
Personnel expenses
Personnel expenses constitute a significant portion of our operating costs and expenses. In 2014, 2015 and 2016, personnel expenses represented
25.5%, 26.1% and 26.4% of our total operating costs and expenses, respectively, and pension costs represented 1.9%, 1.9% and 1.9% of our total operating costs and expenses, respectively. The table below sets forth information regarding our personnel
expenses and as a percentage of our total operating costs and expenses for the periods indicated.
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Year Ended December 31
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2014
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2015
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2016
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(in billions of NT$, except percentages)
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Personnel expenses:
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Salaries
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24.9
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13.6
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%
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25.5
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14.1
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%
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26.0
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14.3
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%
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Insurance
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2.6
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1.4
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2.6
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1.4
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2.7
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1.5
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Pension
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3.4
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1.9
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3.4
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1.9
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3.4
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1.9
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Other
(1)
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15.7
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8.6
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15.8
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8.7
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15.7
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8.7
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Total personnel expenses
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46.6
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25.5
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%
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|
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47.3
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26.1
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%
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|
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47.8
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26.4
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%
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Total operating costs and expenses
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182.4
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100.0
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%
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181.3
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100.0
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%
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181.4
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100.0
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%
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(1)
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Includes employees bonus or compensation.
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At the time of our privatization, we settled
all of our then existing defined benefit pension obligations in full. After completing our privatization on August 12, 2005, all of our continuing employees were deemed to have commenced employment as of August 12, 2005 for seniority
purposes under our pension plans in effect after privatization. Under applicable ROC regulations, upon our privatization, the MOTC assumed the obligation to make annuity payments to all of our employees that retired before our privatization.
Taxation
The income tax rate for
profit-seeking enterprises is 17% in the ROC. We benefit from tax incentives, including tax credits of up to 15% of some of our research and development expenses in accordance with the Statute for Innovating Industries.
In 1997, the Income Tax Act of the ROC was amended to integrate corporate income tax and stockholder dividend tax to eliminate the double
taxation effect for resident stockholders of Taiwan companies. Under the amendment,
after-tax
earnings generated from January 1, 1998 and not distributed to stockholders as dividends in the following year
are assessed with a 10% unappropriated earnings tax. See Item 10. Additional InformationE. TaxationROC TaxationDividends. Under IFRSs, the 10% tax on unappropriated earnings is accrued during the year the earnings arise
and adjusted to the extent that distributions are approved by the stockholders in the following year. In 2014, due to the reversal of the 10% unappropriated earnings tax accrued in 2013, which was much lower than that accrued in 2014, net
unappropriated earnings tax accrued in 2014 was higher than that accrued in 2015, and our effective tax rate decreased from 19.3% in 2014 to 17.5% in 2015 as a result. In 2016, due to the reversal of the 10% unappropriated earnings tax accrued in
2015, which was much higher than that accrued in 2016, net unappropriated earnings tax accrued in 2016 was lower than that accrued in 2015. As a result, our effective tax rate decreased from 17.5% in 2015 to 15.8% in 2016.
63
Effect of adopting Taiwan IFRSs on our dividends and employee bonuses
Beginning on January 1, 2013, we have adopted Taiwan IFRSs for reporting our annual and interim consolidated financial statements in the
ROC in accordance with the requirements of the FSC. At the same time, we have adopted IFRSs, which has certain significant differences from Taiwan IFRSs, for reporting our annual and interim consolidated financial statements with the SEC, including
this annual report and future annual reports on Form
20-F.
Our dividends have been calculated
based on Taiwan IFRSs since 2013. According to local regulations, our unappropriated earnings before earnings distributions for the year ended December 31, 2013 needs to first offset the decrease of unappropriated earnings on the date of
transition to Taiwan IFRSs (January 1, 2012), which led to a decrease in earnings available for our dividends and employee bonuses compared to prior years. As a result of these decreases in our dividends and employee bonuses, in March 2014, our
board of directors approved an additional distribution to our shareholders from additional
paid-in
capital in the amount of NT$16.6 billion and a
one-time
additional bonus to our employees in the amount of NT$0.7 billion. The NT$16.6 billion additional distributions to our shareholders were approved at our annual general stockholders meeting on June 24, 2014 and such amount was
subsequently paid in August 2014.
Our consolidated financial statements prepared under Taiwan IFRSs have not been included in this annual
report and do not form a part of this annual report.
Critical Accounting Policies
Summarized below are our accounting policies that we believe are both important to the portrayal of our financial results and involve the need
for management to make estimates about the effect of matters that are uncertain in nature. Actual results may differ from these estimates, judgments and assumptions. Certain accounting policies are particularly critical because of their significance
to our reported financial results and the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by our management in preparing our financial statements. The
following discussion should be read in conjunction with the consolidated financial statements and related notes, which are included in this annual report.
Revenue Recognition
Revenue from
the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:
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We have transferred to the buyer the significant risks and rewards of ownership of the goods;
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We retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
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The amount of revenue can be measured reliably;
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It is probable that the economic benefits associated with the transaction will flow to us; and
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The costs incurred or to be incurred in respect of the transaction can be measured reliably.
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Revenue is measured at the fair value of the consideration received or receivable and represents amounts for goods sold in the normal course
of business, net of sales discounts and volume rebates. For trade notes and accounts receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions
are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.
64
Usage revenues from fixed-line services (including local, domestic long distance and
international long distance telephone services), cellular services, internet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon
seconds or minutes of traffic processed when the services are provided in accordance with contract terms.
Other revenues are recognized
as follows:
(a) one-time
subscriber connection fees (on fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services,
mobile, internet and data services) are accrued every month, and (c) prepaid services (fixed-line, mobile, internet and data services) are recognized as income based upon actual usage by customers.
Where we enter into transactions which involve both the provision of telecommunications service bundled with products such as handsets, total
consideration received from products and telecommunications service in these arrangements are allocated and measured using units of accounting within the arrangement based on their relative fair values limited to the amount that is not contingent
upon the delivery of products or services. Relative fair values are based on the selling prices of handsets on a standalone basis and the monthly fees provided in the subscription contracts.
Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract.
Our project agreements are mainly to provide one or more equipment or services to customers. In order to fulfill the agreements, another party
may be involved in some agreements. We consider the following factors to determine whether we are a principal of the transaction: whether we are the primary obligation provider of the agreements, our exposures to inventory risks and the discretion
in establishing prices, etc. The determination of whether we are a principal or an agent will affect the amount of revenue recognized by us. Only when we are acting as a principal, gross inflows of economic benefits arising from transactions is
recognized as revenue.
Dividend income from investments is recognized when the stockholders right to receive payment has been
established, under the premises when it is probable that the economic benefits related to the transactions will flow to us and that the revenue can be reasonably measured.
Interest income from a financial asset is recognized when it is probable that the economic benefits related to the transactions will flow to
us and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
Impairment of Trade notes and Accounts Receivable
When there is objective evidence showing indications of impairment, we consider the estimation of future cash flows. The amount of impairment
will be measured as the difference between the carrying amount and the present value of estimated future cash flows discounted by the original effective interest rates of the financial assets. However, as the impact from discounting short-term
receivables is not material, the impairment of short-term receivables is measured at the difference between the carrying amount and the estimated undiscounted future cash flows. Where the actual future cash flows are lower than expected, a material
impairment loss may arise.
We maintain an allowance for doubtful accounts for estimated losses that result from the inability of our
customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past customers default experience and their credit status, and economic and industrial factors. Credit risks are assessed
based on historical write-offs, net of recoveries, and an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved when specific collection issues are
known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly.
65
Provision for inventory valuation and obsolescence
Inventories are stated at the lower of cost or net realizable value. Estimates of net realizable value are based on the most reliable evidence
available at the time the estimates are made at the end of reporting period. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events
confirm conditions existing at the end of the period. Inventory write-downs are determined on an item by item basis, except for those similar items which could be categorized into the same groups. We use the inventory holding period and turnover as
the evaluation basis for inventory obsolescence losses.
Useful Lives of Long-Lived Assets
A significant portion of our total assets consists of long-lived assets, primarily property, plant and equipment and definite-lived
intangibles. We estimate the useful lives of property, plant and equipment and other long-lived assets with finite lives in order to determine the period of time over which depreciation and amortization expenses should be recorded. The useful lives
are estimated at the time assets are acquired and are based on historical experience with similar assets as well as the anticipated technological evolution or other environmental changes. Further, we review the estimated useful lives of long-lived
assets at the balance sheet date. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of
increased depreciation and amortization in the relevant periods.
Control over Subsidiaries
Some entities are our subsidiaries although we only own less than 50% ownership interest in these entities. After considering our absolute size
of holding in the entity and the relative size of and the dispersion of shares owned by the other stockholders, and the contractual arrangements between us and other investors, potential voting interests and the written agreement between
stockholders, the management concluded that we have a sufficiently dominant voting interest to direct the relevant activities of the entity and therefore we have control over these entities.
Investments in Unconsolidated Companies
An associate is an entity over which we have significant influence and that is neither a subsidiary nor an interest in a joint venture. A joint
venture is a joint arrangement whereby we and other parties that have joint control of the arrangement and have rights to the net assets of the arrangement.
Investments accounted for using the equity method include investments in associates and interests in joint ventures. Under the equity method,
an investment in an associate or joint venture is initially recognized at cost and adjusted thereafter to recognize our share of profit or loss and other comprehensive income of the associate and joint venture as well as the distribution received.
When we reduce our ownership interest in an associate or a joint venture but we continue to use the equity method, we reclassify to
profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the
related assets or liabilities.
Any excess of the cost of acquisition over our share of the fair value of the identifiable net assets and
liabilities of an associate and joint venture at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment and shall not be amortized. Any excess of our share of the net fair value of the
identifiable assets and liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.
66
We assess the impairment of investments accounted for using the equity method whenever triggering
events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The entire carrying amount of the investment, including goodwill, is tested for impairment as a single asset by comparing its
recoverable amount with its carrying amount. We measure the impairment based on the projected future cash flow of the investees, the underlying assumptions for which had been formulated by such investees internal management team, taking into
account sales growth and capacity utilization. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment
subsequently increases.
Our other equity investments are classified as
available-for-sale,
or AFS, financial assets including: listed stocks, emerging market stocks, and unlisted stocks. Among these investments, those that have a quoted
market price in an active market are classified as AFS and measured at fair value at the end of each reporting period; the others that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are
measured at cost less any identified impairment losses at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The
difference between the carrying amount and the fair value is recognized in other comprehensive income. Any impairment losses are recognized in profit or loss.
Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates, interest income
calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS financial assets are recognized in other comprehensive income and will be
reclassified to profit or loss when the investment is disposed of or is determined to be impaired.
The process of assessing whether a
particular investments net realizable value is less than its carrying cost requires a significant amount of judgment. We periodically evaluate these investments based on quoted market prices, if available, the financial condition of the
investee company, economic conditions in the industry and our intent and ability to hold the investment for a long period of time. If quoted market prices are not available, we estimate the fair value using the recoverable amounts in consideration
of the financial condition of the investee company. This information may be based on information that we request from the investee companies and may not be subject to the same disclosure and audit requirements as required of
non-foreign
private issuers, and as such, the reliability and accuracy of the information may vary. If we deem the fair value of an investment to be less than the carrying value based on the above factors, and the
decline in value is deemed to be other than temporary, we record the difference as impairment in the period of occurrence. In 2014, 2015 and 2016, we recognized impairment losses of NT$23 million, NT$107 million and NT$577 million
(US$17.8 million), respectively, for the investments classified as AFS financial assets.
Impairment of long-lived assets and intangible assets
We assess the impairment of long-lived assets and intangible assets whenever triggering events or changes in circumstances
indicate that the asset may be impaired and carrying value may not be recoverable. Indications we consider important which could trigger an impairment review include, but are not limited to, the following:
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External sources of information:
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during the period, an assets market value has declined significantly more than what would be expected as a result of the passage of time or normal use.
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significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity
operates or in the market to which an asset is dedicated.
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market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an assets value in use and
decrease the assets recoverable amount materially.
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the carrying amount of the net assets of the entity is more than its market capitalization.
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67
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Internal sources of information:
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evidence is available of obsolescence or physical damage of an asset.
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significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected
to be used.
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evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
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When an indication of impairment is identified for long-lived assets and intangible assets other than goodwill, any excess of the carrying
amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted
amount may not exceed the carrying amount that would have been determined, as if no impairment loss had been recognized.
Goodwill
represents the excess of the consideration paid for business acquisition over the fair value of identifiable net assets acquired. Goodwill is tested for impairment at least annually, or if an event occurs or circumstances change which indicates that
the fair value of goodwill is below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.
In 2014, 2015 and 2016, we determined that some of our telecommunications equipment and miscellaneous equipment were impaired and recognized
an impairment loss of NT$64 thousand, NT$138 million and NT$596 million (US$18.4 million) respectively.
In 2015 and 2016,
we determined that some of our investment properties recoverable amount which represented the fair value less costs to sell of some land and buildings was higher than the carrying amount and recognized reversals of impairment loss of
NT$142 million and NT$148 million (US$4.6 million), respectively.
Pension Benefits
Payments to defined contribution retirement benefit plans are recognized as an expense when employees rendered services entitling them to the
contributions.
Defined benefit costs (including service cost, net interest and remeasurement) under the defined benefit retirement
benefit plans are determined using the projected unit credit method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions
will affect these assumptions and may have a material impact on the amount of the expense and the liability.
Service cost (including
current service cost and gains or losses on settlements) and net interest on the net defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising (a) actuarial gains and
losses; and (b) the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other
comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss.
Net defined benefit
liability (asset) represents the actual deficit (surplus) in our defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any refunds from the plans or reductions in future contributions to the plans.
Curtailment or settlement gains or losses on the defined benefit plan are recognized when the curtailment or settlement occurs.
68
Accounting for Income Taxes
Income tax expense represents the sum of the tax currently payable and deferred tax.
The current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statements of
comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the end of the reporting period. Income tax (10%) on undistributed earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following
year. Adjustments of prior years tax liabilities are added to or deducted from the current years tax provision.
Deferred tax
is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. If the temporary difference arises from
the initial recognition, other than in a business combination, of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In
addition, a deferred tax liability is not recognized on taxable temporary difference arising from initial recognition of goodwill.
Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all
deductible temporary differences, unused loss carry forward and unused tax credits from purchase of machinery, equipment and technology, and research and development expenditures to the extent that it is probable that taxable profits will be
available against which those deductible temporary differences can be utilized.
Deferred tax liabilities are recognized for taxable
temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits
against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The
carrying amount of deferred tax assets is reviewed at the balance sheet date, and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously
unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled
or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from
the manner in which we expect, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income,
in which case, the current and deferred tax are also recognized in other comprehensive income.
Where current tax or deferred tax arises
from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
69
Our Financial Reporting Obligations
Our ongoing financial reporting in our Form
20-F
annual reports and interim financial reporting
furnished to the SEC on
Form 6-K
had been based on U.S. GAAP through fiscal year 2007. Beginning with our first quarter interim financial report furnished on Form
6-K
and our Form
20-F
annual report for fiscal year 2008, we prepared our financial statements under ROC GAAP, with reconciliations of net income and balance sheet
differences of our consolidated financial statements to U.S. GAAP. Beginning in 2013, we adopted Taiwan IFRSs for our reporting obligations in the ROC, including our annual consolidated financial statements and our interim quarterly unaudited
consolidated financial statements beginning in the first quarter of 2013. While we have adopted Taiwan IFRSs for ROC reporting obligations, we prepared financial statements under IFRSs for certain filings with the SEC, including our annual reports
on Form
20-F
for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for the SEC filing purposes, we are no longer required to provide any reconciliation of our consolidated
financial statements with U.S. GAAP.
A. Operating Results
The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data for the periods
indicated.
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Year Ended December 31
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2014
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2015
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2016
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NT$
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NT$
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NT$
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US$
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(in billions)
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Revenues:
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Domestic Fixed Communications
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72.1
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72.5
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72.8
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2.3
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Mobile communications
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110.7
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114.9
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110.8
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3.4
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Internet
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26.0
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25.8
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28.1
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0.9
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International fixed communications
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15.3
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15.5
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14.4
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0.4
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Others
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2.5
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3.1
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3.9
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0.1
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Total revenues
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226.6
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231.8
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230.0
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7.1
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Operating costs
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148.4
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148.1
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147.6
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4.6
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Operating expenses:
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Marketing
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26.1
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25.1
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25.5
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0.8
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General and administrative
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4.4
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4.5
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4.5
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0.1
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Research and development
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3.5
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|
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3.6
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3.8
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0.1
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Total operating expenses
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34.0
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33.2
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33.8
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1.0
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Other income and expenses
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0.6
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(0.1
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)
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(0.5
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)
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(0.0
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)
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Income from operations
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44.8
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|
|
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50.4
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|
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48.1
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|
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1.5
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Non-operating
income and expenses
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1.8
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|
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|
1.6
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|
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1.3
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|
|
|
0.0
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Income before income tax
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46.6
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52.0
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49.4
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1.5
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Income tax expense
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9.0
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|
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9.1
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|
|
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7.8
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|
|
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0.2
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|
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|
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|
|
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Consolidated net income
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37.6
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|
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42.9
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41.6
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1.3
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|
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Attributable to:
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Stockholders of the parent
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37.0
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42.1
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40.5
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1.3
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|
Noncontrolling interests
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|
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0.6
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0.8
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1.1
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|
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0.0
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70
The following table sets forth our revenues, operating costs and expenses, income from operations
and other financial data as a percentage of our total revenues for the periods indicated.
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Year Ended December 31
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2014
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2015
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2016
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(as percentages of total revenues)
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Revenues:
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|
|
|
|
|
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|
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Domestic fixed communications
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31.8
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%
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31.3
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%
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31.6
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%
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Mobile communications
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48.8
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|
|
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49.6
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|
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48.2
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Internet
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11.5
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|
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11.1
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12.2
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International fixed communications
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6.8
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6.7
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6.3
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|
Others
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|
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1.1
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|
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1.3
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1.7
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|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
65.5
|
%
|
|
|
63.9
|
%
|
|
|
64.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
11.5
|
|
|
|
10.8
|
|
|
|
11.1
|
|
General and administrative
|
|
|
2.0
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Research and development
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15.0
|
|
|
|
14.3
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19.8
|
|
|
|
21.7
|
|
|
|
20.9
|
|
Non-operating
income and expenses
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
20.6
|
|
|
|
22.4
|
|
|
|
21.5
|
|
Income tax expense
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
|
16.6
|
%
|
|
|
18.5
|
%
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders of the parent
|
|
|
16.3
|
%
|
|
|
18.2
|
%
|
|
|
17.6
|
%
|
Noncontrolling interests
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.5
|
%
|
Each of our operating segments is managed separately because each represents a strategic business unit that
serves a different market. We measure our segment performances mainly based on revenues and income before income tax.
The year ended December 31,
2016 compared with the year ended December 31, 2015
Revenues
Our revenues decreased by 0.8% from NT$231.8 billion in 2015 to NT$230.0 billion (US$7.1 billion) in 2016. This decrease was
primarily due to the decrease in revenues generated from mobile communications.
Domestic fixed communications
Domestic fixed communications revenues accounted for 31.3% and 31.6% of our revenues in 2015 and 2016, respectively. Our domestic fixed-line
revenues increased by 0.3% from NT$72.5 billion in 2015 to NT$72.8 billion (US$2.3 billion) in 2016 primarily due to growth in ICT revenues generated by enterprises and government, which was partially offset by a decrease in local and
domestic long distance telephone revenues.
Local telephone services.
Our local telephone revenues decreased from
NT$33.6 billion in 2015 to NT$31.6 billion (US$1.0 billion) in 2016 with a 9.8% decline in traffic volume from 10.5 billion minutes in 2015 to 9.5 billion minutes in 2016. The decline in traffic volume was primarily due to the
traffic migration from fixed-line services to mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.
Domestic long distance telephone services.
Our domestic long distance telephone revenues decreased by 7.6% from NT$3.1 billion in
2015 to NT$2.9 billion (US$0.1 billion) in 2016. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.
Broadband access.
The number of our FTTx customers increased from approximately 3.4 million in 2015 to approximately
3.5 million in 2016. The number of our ADSL customers decreased from 1.1 million in 2015 to approximately 1.0 million in 2016 due to the customers migration to our FTTx services. Revenues generated from broadband access slightly
decreased from NT$19.3 billion in 2015 to NT$19.0 billion (US$0.6 billion) in 2016, mainly due to increased competition in the market and the mandatory tariff reduction.
71
Domestic leased line
. Our tariffs for overall leased line services continued to decrease
due to competition from other fixed-line operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line services decreased from NT$4.4 billion in
2015 to NT$4.3 billion (US$0.1 billion) in 2016.
MOD
. Revenues generated from our MOD services decreased by 5.5% from
NT$2.5 billion in 2015 to NT$2.4 billion (US$72.7 million) in 2016. This decrease was due to the adjustment of our cooperation schemes with channel providers started from third quarter in 2015. The new schemes bring down our operating
expenses while also impacting our revenues at the same time. We expect this structural change to enhance our IPTV margins in the
mid-to-long
term.
Domestic ICT and other services
. Other revenues increased by 30.5% from NT$9.6 billion in 2015 to NT$12.6 billion (US$0.4
billion) in 2016. This increase was mainly due to the increased revenue from ICT projects.
Mobile communications
Revenues from our mobile communications business segment accounted for 49.6% and 48.2% of our revenues in 2015 and 2016, respectively. Revenues
from our mobile communications business segment decreased by 3.5% from NT$114.9 billion in 2015 to NT$110.8 billion (US$3.4 billion) in 2016. This decrease was due to the decline in mobile voice telecommunication revenues and sales of
mobile handsets, tablets and data cards and was offset by growth in mobile VAS revenues. The decrease in mobile voice telecommunication traffic was mainly due to migration to free VoIP applications.
Mobile services
. Revenues from our mobile services accounted for 34.9% and 34.2% of our revenues in 2015 and 2016, respectively.
Revenues from our mobile services decreased by 2.6% from NT$80.9 billion in 2015 to NT$78.8 billion (US$2.4 billion) in 2016 due to a decrease in mobile voice telecommunication revenues from NT$41.3 billion in 2015 to
NT$37.3 billion (US$1.2 billion) in 2016, which was partially offset by the growth in mobile VAS revenues.
Sales of mobile
handsets, tablets and data cards
. Revenues from our sales of mobile handsets, tablets and data cards accounted for 14.3% and 13.4% of our revenues in 2015 and 2016, respectively. Revenues from our sales of mobile handsets, tablets and data cards
decreased by 7.0% from NT$33.2 billion in 2015 to NT$30.8 billion (US$1.0 billion) in 2016. This decrease was primarily due to lower sales of smartphones and tablets, as a result of the overall decrease in sales of smart devices in the
entire market in Taiwan.
Internet
Revenues from internet business accounted for 11.1% and 12.2% of our revenues in 2015 and 2016, respectively. Revenues from our internet
services increased by 9.0% from NT$25.8 billion in 2015 to NT$28.1 billion (US$0.9 billion) in 2016 mainly due to the increase in revenues generated from services such as IDC, cloud computing, information security and IoT.
International fixed communications
International fixed communications revenues accounted for 6.7% and 6.3% of our revenues in 2015 and 2016, respectively. Our international fixed
communications revenues decreased by 6.6% from NT$15.5 billion in 2015 to NT$14.4 billion (US$0.4 billion) in 2016. This decrease was mainly due to the decrease in revenues generated from international long distance telephone service.
International long distance telephone services
. Our international long distance telephone revenues decreased by 8.5% from
NT$9.6 billion in 2015 to NT$8.8 billion (US$0.3 billion) in 2016 due to the migration to VoIP-based international long distance service providers and free VoIP applications.
International ICT and other services
. Our international ICT and other revenues increased by 12.2% from NT$1.6 billion in 2015 to
NT$1.7 billion (US$53.8 million) in 2016. The main reason for the revenue growth in 2016 is that we provide overseas ICT service for multinational enterprises and our customers benefit from our one stop shopping service for total solutions to
overseas business sites.
Others
Other revenues accounted for 1.3% and 1.7% of our revenues in 2015 and 2016, respectively. Our other revenues increased by 23.1% from
NT$3.1 billion in 2015 to NT$3.9 billion (US$0.1 billion) in 2016. The increase was mainly due to operating growth derived from one of our subsidiaries, CHPT, a semiconductor testing company.
72
Operating Costs
Our operating costs include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service
expenses, costs of materials and maintenance and spectrum usage and license fees.
Our operating costs decreased by 0.4% from
NT$148.1 billion in 2015 to NT$147.6 billion (US$4.6 billion) in 2016. This decrease was primarily due to a decrease of NT$1.8 billion (US$0.1 billion) in interconnection and service expenses, and a decrease of NT$1.5 billion
(US$45.6 million) in cost of goods sold. The decrease was partially offset by an increase of NT$2.8 billion (US$0.1 billion) in ICT costs.
Operating Expenses
Our operating
expenses increased by 1.9% from NT$33.2 billion in 2015 to NT$33.8 billion (US$1.0 billion) in 2016. This increase was primarily due to an increase in marketing expenses.
Marketing
Our marketing expenses, which
include personnel expenses, expenses relating to advertising and marketing-related activities and provision for bad debt, increased by 1.8% from NT$25.1 billion in 2015 to NT$25.5 (US$0.8 billion) billion in 2016. This increase was primarily
due to increases of provision for bad debt and personnel expenses. The increase was partially offset by a decrease of outsourcing expenses.
General
and administrative
Our general and administrative expenses remained stable at NT$4.5 billion (US$0.1 billion) in 2015 and 2016.
Research and development
Our
research and development expenses increased by 4.6% from NT$3.6 billion in 2015 to NT$3.8 billion (US$0.1 billion) in 2016. This increase was primarily due to an increase in personnel expenses. In 2015 and 2016, we did not capitalize any
research and development expenses as intangible assets because there were no research and development expenses related to development or the development phase of an internal project in 2015 and 2016.
Operating Costs and Expenses by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Fixed
Communications
|
|
|
Mobile
Communications
|
|
|
Internet
|
|
|
International
Fixed
Communications
|
|
|
Others
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in billions of NT$)
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
70.3
|
|
|
|
99.1
|
|
|
|
22.1
|
|
|
|
16.0
|
|
|
|
10.6
|
|
|
|
(36.7
|
)
|
|
|
181.4
|
|
Depreciation and amortization
|
|
|
16.4
|
|
|
|
10.6
|
|
|
|
3.6
|
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
|
|
|
|
32.5
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
71.0
|
|
|
|
98.9
|
|
|
|
20.6
|
|
|
|
16.5
|
|
|
|
9.2
|
|
|
|
(34.9
|
)
|
|
|
181.3
|
|
Depreciation and amortization
|
|
|
17.5
|
|
|
|
10.4
|
|
|
|
3.6
|
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
|
|
|
|
33.4
|
|
Domestic fixed communications
Our domestic fixed communications costs and expenses decreased by 0.9% from NT$71.0 billion in 2015 to NT$70.3 billion (US$2.2
billion) in 2016, primarily due to a decrease of NT$1.5 billion (US$44.8 million) in interconnection costs, a decrease of NT$1.1 billion (US$33.3 million) in depreciation and amortization expenses, and a decrease of NT$0.5 billion
(US$15.4 million) in personnel expenses. The decrease in our operating costs and expenses was partially offset by an increase of NT$2.6 billion (US$0.1 billion) in ICT costs.
73
Mobile communications
Our mobile communications operating costs and expenses increased by 0.2% from NT$98.9 billion in 2015 to NT$99.1 (US$3.1 billion) billion
in 2016. This increase was primarily due to an increase of NT$1.6 billion (US$49.4 million) in intersegment leased line expenses, an increase of NT$0.5 billion (US$14.2 million) in marketing expenses, an increase of NT$0.2 billion
(US$5.6 million) in depreciation and amortization expenses, an increase of NT$0.2 billion in intersegment internet VAS expenses (US$5.2 million), an increase of NT$0.2 billion (US$5.2 million) in maintenance expenses, and an increase of
NT$0.2 billion (US$4.6 million) in rental expenses. The increase in our operating costs and expenses was partially offset by a decrease of NT$1.5 billion (US$46.6 million) in cost of goods sold from our subsidiary, Senao, and a decrease of
NT$1.1 billion (US$33.0 million) in interconnection expenses.
Internet
Our internet operating costs and expenses increased by 7.5% from NT$20.6 billion in 2015 to NT$22.1 billion (US$0.7 billion) in 2016.
This increase was primarily due to an increase of NT$0.6 billion (US$17.9 million) in ICT costs, an increase of NT$0.4 billion (US$12.0 million) in maintenance and rental expenses, an increase of NT$0.3 billion (US$8.6 million) in
costs of award credits and an increase of NT$0.1 billion (US$3.1 million) in leased line expenses.
International fixed communications
Our international fixed communications costs and expenses decreased by 2.8% from NT$16.5 billion in 2015 to NT$16.0 billion (US$0.5
billion) in 2016. The decrease was primarily due to a decrease of NT$0.3 billion (US$8.6 million) in intersegment interconnection costs, a decrease of NT$0.2 billion (US$6.8 million) in international settlement expenses, and a decrease of
NT$0.1 billion (US$2.2 million) in personnel expenses. The decrease in our operating costs and expenses was partially offset by an increase of NT$0.2 billion (US$6.5 million) in ICT costs.
Others
The costs and expenses from our
other business increased by 13.8% from NT$9.2 billion in 2015 to NT$10.6 billion (US$0.3 billion) in 2016. The increase was primarily due to an increase in operating costs and expenses from our subsidiaries, Honghwa International Co.,
Ltd., or Honghwa, and CHPT due to the business growth of these two entities. The increase was partially offset by a decrease in intersegment cloud service expenses.
Other Income and Expenses
We
recorded net other expense of NT$0.1 billion in 2015 and NT$0.5 billion (US$15.3 million) in 2016, respectively. The difference between 2015 and 2016 was primarily due to the impairment losses on some telecommunications equipment of
NT$0.6 billion (US$18.4 million) in 2016.
Income from Operations and Operating Margin
As a result of the foregoing, our income from operations decreased by 4.5% from NT$50.4 billion in 2015 to NT$48.1 billion (US$1.5
billion) in 2016. Our operating margin decreased from 21.7% in 2015 to 20.9% in 2016.
74
The following table sets forth certain information regarding our revenues and income before
income tax by business segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Fixed
Communications
|
|
|
Mobile
Communications
|
|
|
Internet
|
|
|
International
Fixed
Communications
|
|
|
Others
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in billions of NT$)
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
72.8
|
|
|
|
110.8
|
|
|
|
28.1
|
|
|
|
14.4
|
|
|
|
3.9
|
|
|
|
|
|
|
|
230.0
|
|
Intersegment service revenues
|
|
|
22.7
|
|
|
|
2.5
|
|
|
|
4.7
|
|
|
|
2.7
|
|
|
|
4.1
|
|
|
|
(36.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.5
|
|
|
|
113.3
|
|
|
|
32.8
|
|
|
|
17.1
|
|
|
|
8.0
|
|
|
|
(36.7
|
)
|
|
|
230.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income tax
|
|
|
25.7
|
|
|
|
13.9
|
|
|
|
10.7
|
|
|
|
1.1
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
49.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
72.5
|
|
|
|
114.9
|
|
|
|
25.8
|
|
|
|
15.5
|
|
|
|
3.1
|
|
|
|
|
|
|
|
231.8
|
|
Intersegment service revenues
|
|
|
21.4
|
|
|
|
3.5
|
|
|
|
4.7
|
|
|
|
2.1
|
|
|
|
3.2
|
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.9
|
|
|
|
118.4
|
|
|
|
30.5
|
|
|
|
17.6
|
|
|
|
6.3
|
|
|
|
(34.9
|
)
|
|
|
231.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income tax
|
|
|
23.3
|
|
|
|
19.4
|
|
|
|
9.9
|
|
|
|
1.1
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
52.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the foregoing, segment income before tax for our domestic fixed communications business
increased by 10.4% from NT$23.3 billion in 2015 to NT$25.7 billion (US$0.8 billion) in 2016; segment income before tax for our mobile communications business decreased by 28.2% from NT$19.4 billion in 2015 to NT$13.9 (US$0.4 billion)
billion in 2016; segment income before tax for our internet business increased by 8.2% from NT$9.9 billion in 2015 to NT$10.7 billion (US$0.3 billion) in 2016; segment income before tax for our international fixed communications business
remained stable at NT$1.1 billion (US$33.9 million) in 2015 and 2016; and segment loss for our other business segments increased by 16.8% from NT$1.7 billion in 2015 to NT$2.0 billion (US$61.6 million) in 2016.
Non-operating
Income and Expenses
Our
non-operating
income decreased from NT$1.6 billion in 2015 to NT$1.3 billion (US$40.4
million) in 2016. This decrease was primarily due to an increase in impairment losses on
available-for-sale
financial assets.
Income Tax
Our income tax was
NT$9.1 billion and NT$7.8 billion (US$0.2 billion) in 2015 and 2016, respectively. Our effective tax rate was 17.5% in 2015 and 15.8% in 2016. The decrease in our effective tax rate from 2015 to 2016 was primarily due to a decrease in the
10% tax on unappropriated earnings. See Item 5. Operating and Financial Review and ProspectsOverviewTaxation for a discussion of the change in tax rate.
Net Income
As a result of the
foregoing, our net income attributable to stockholders of the parent was NT$42.1 billion and NT$40.5 billion (US$1.3 billion) in 2015 and 2016, respectively. Our net margin decreased from 18.2% in 2015 to 17.6% in 2016.
The year ended December 31, 2015 compared with the year ended December 31, 2014
Revenues
Our revenues increased by
2.3% from NT$226.6 billion in 2014 to NT$231.8 billion in 2015. This increase was primarily due to the increase in revenues generated from mobile communications.
75
Domestic fixed communications
Domestic fixed communications revenues accounted for 31.8% and 31.3% of our revenues in 2014 and 2015, respectively. Our domestic fixed-line
revenues increased by 0.7% from NT$72.1 billion in 2014 to NT$72.5 billion in 2015 primarily due to growth in ICT revenues generated by enterprises and government, which was partially offset by a decrease in local and domestic long
distance telephone revenues.
Local telephone services.
Our local telephone revenues decreased from NT$35.6 billion in 2014 to
NT$33.6 billion in 2015 with a 9.1% decline in traffic volume from 11.6 billion minutes in 2014 to 10.5 billion minutes in 2015. The decline in traffic volume was primarily due to the traffic migration from fixed-line services to
mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.
Domestic long distance telephone services.
Our domestic long distance telephone revenues decreased by 5.7% from NT$3.3 billion in
2014 to NT$3.1 billion in 2015. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.
Broadband access.
The number of our FTTx customers increased from approximately 3.1 million in 2014 to approximately
3.4 million in 2015. The number of our ADSL customers decreased from 1.4 million in 2014 to 1.1 million in 2015 due to the customers migration to our FTTx services. Revenues generated from broadband access slightly increased
from NT$19.1 billion in 2014 to NT$19.3 billion in 2015, mainly due to our successful migration strategy mentioned above.
Domestic leased line
. Our tariffs for overall leased line services have continued to decrease due to competition from other fixed-line
operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line services decreased from NT$4.6 billion in 2014 to NT$4.4 billion in 2015.
MOD
. Revenues generated from our MOD services decreased by 3.0% from NT$2.6 billion in 2014 to NT$2.5 billion in 2015. This
decrease was due to the adjustment in our cooperation schemes with channel providers. The new schemes bring down our operating expenses while also impacting our revenues at the same time. We expect this structural shift to enhance our IPTV margins
in the
mid-to-long
term.
Others
. Other revenues
increased by 39.6% from NT$6.9 billion in 2014 to NT$9.6 billion in 2015. This increase was mainly due to the increased number of ICT projects generated by enterprises and government.
Mobile communications
Revenues from our
mobile communications business segment accounted for 48.8% and 49.6% of our revenues in 2014 and 2015, respectively. Revenues from our mobile communications business segment increased by 3.8% from NT$110.7 billion in 2014 to
NT$114.9 billion in 2015. This increase was principally due to growth in mobile VAS revenues and was partially offset by a decline in mobile voice telecommunication revenues. The decrease in mobile voice telecommunication traffic was mainly due
to migration to free VoIP applications.
Mobile services
. Revenues from our mobile services accounted for 34.2% and 34.9% of our
revenues in 2014 and 2015, respectively. Revenues from our mobile services increased by 4.4% from NT$77.5 billion in 2014 to NT$80.9 billion in 2015 due to an increase in mobile VAS revenues from NT$34.8 billion in 2014 to
NT$39.6 billion in 2015, which was partially offset by a decline in mobile voice telecommunication revenues.
Sales of mobile
handsets, tablets and data cards
. Revenues from our sales of mobile handsets, tablets and data cards accounted for 14.3% of our revenues both in 2014 and 2015. Revenues from our sales of mobile handsets, tablets and data cards increased by 2.2%
from NT$32.5 billion in 2014 to NT$33.2 billion in 2015. This increase was principally due to an increase in sales of smart devices such as iPhone.
Internet
Revenues from internet business
accounted for 11.5% and 11.1% of our revenues in 2014 and 2015, respectively. Revenues from our internet services decreased slightly by 0.8% from NT$26.0 billion in 2014 to NT$25.8 billion in 2015 due to a decrease in VAS revenue generated
from information services of the land administration system that we established for the Land Administration Department of local governments, and the decrease was primarily affected by the downturn in the property market.
76
International fixed communications
International fixed communications revenues accounted for 6.8% and 6.7% of our revenues in 2014 and 2015, respectively. Our international fixed
communications revenues increased by 1.0% from NT$15.3 billion in 2014 to NT$15.5 billion in 2015. This increase was mainly derived from one of our overseas subsidiaries, and from international leased line and international data services.
International long distance telephone services
. Our international long distance telephone revenues decreased by 7.5% from
NT$10.4 billion in 2014 to NT$9.6 billion in 2015 due to migration to VoIP-based international long distance service providers and free VoIP applications.
International leased line and international data services
. Our international leased line and international data revenues increased by
13.1% from NT$3.2 billion in 2014 to NT$3.6 billion in 2015. The increase was mainly due to our expansion to overseas markets such as Japan, Hong Kong, Singapore, Thailand and Cambodia and increased demand for our international leased
line, IP Transit and VPN services.
International ICT and other services
. Our international ICT and other revenues increased by
50.1% from NT$1.0 billion in 2014 to NT$1.6 billion in 2015. The increase was mainly due to increased revenues generated from the wholesale of international long distance minutes derived from one of our overseas subsidiaries, Chunghwa
Telecom Singapore Pte., Ltd.
Others
Other revenues accounted for 1.1% and 1.3% of our revenues in 2014 and 2015, respectively. Our other revenues increased by 22.3% from
NT$2.5 billion in 2014 to NT$3.1 billion in 2015. The increase was mainly due to operating growth derived from one of our subsidiaries, CHPT, a semiconductor testing company.
Operating Costs
Operating costs
include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service expenses, costs of materials and maintenance and spectrum usage and license fees.
Our operating costs decreased by 0.2% from NT$148.4 billion in 2014 to NT$148.1 billion in 2015. This decrease was primarily due to
a decrease of NT$2.8 billion in interconnection and service expenses, and a decrease of NT$1.4 billion in depreciation expenses. The decrease was partially offset by an increase of NT$2.3 billion in ICT costs, an increase of
NT$1.0 billion in cost of goods sold and an increase of NT$0.8 billion in amortization expenses.
Operating Expenses
Our operating expenses decreased by 2.5% from NT$34.0 billion in 2014 to NT$33.2 billion in 2015. This decrease was primarily due to
a decrease in marketing expenses.
Marketing
Our marketing expenses, which include personnel expenses, expenses relating to advertising and marketing-related activities and provision for
bad debt, decreased by 4.1% from NT$26.1 billion in 2014 to NT$25.1 billion in 2015. This decrease was primarily due to a decrease of outsourcing expenses in 2015 and the voluntary retirement program implemented in 2014, which resulted in
a higher pension expense in 2014.
77
General and administrative
Our general and administrative expenses increased by 2.3% from NT$4.4 billion in 2014 to NT$4.5 billion in 2015. This increase was
primarily due to an increase in bonuses to employees.
Research and development
Our research and development expenses increased by 3.2% from NT$3.5 billion in 2014 to NT$3.6 billion in 2015. This increase was
primarily due to an increase in personnel expenses for research and development. In 2014 and 2015, we did not capitalize any research and development expenses as intangible assets because there were no research and development expenses related to
development or the development phase of an internal project in 2014 and 2015.
Operating Costs and Expenses by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Fixed
Communications
|
|
|
Mobile
Communications
|
|
|
Internet
|
|
|
International
Fixed
Communications
|
|
|
Others
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in billions of NT$)
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
71.0
|
|
|
|
98.9
|
|
|
|
20.6
|
|
|
|
16.5
|
|
|
|
9.2
|
|
|
|
(34.9
|
)
|
|
|
181.3
|
|
Depreciation and amortization
|
|
|
17.5
|
|
|
|
10.4
|
|
|
|
3.6
|
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
|
|
|
|
33.4
|
|
For the year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
72.6
|
|
|
|
96.9
|
|
|
|
21.3
|
|
|
|
17.5
|
|
|
|
8.5
|
|
|
|
(34.4
|
)
|
|
|
182.4
|
|
Depreciation and amortization
|
|
|
18.6
|
|
|
|
9.9
|
|
|
|
3.4
|
|
|
|
1.8
|
|
|
|
0.4
|
|
|
|
|
|
|
|
34.1
|
|
Domestic fixed communications
Our domestic fixed communications costs and expenses decreased by 2.2% from NT$72.6 billion in 2014 to NT$71.0 billion in 2015,
primarily due to a decrease of NT$2.1 billion in intersegment interconnection costs, a decrease of NT$1.1 billion in depreciation and amortization expenses, a decrease of NT$0.7 billion in personnel expenses, and a decrease of
NT$0.7 billion in material expenses. The decrease in our operating costs was partially offset by an increase of NT$2.7 billion in ICT costs.
Mobile communications
Our mobile
communications operating costs and expenses increased by 2.1% from NT$96.9 billion in 2014 to NT$98.9 billion in 2015. This increase was primarily due to an increase of NT$2.4 billion in leased line expenses, an increase of
NT$1.0 billion in cost of goods sold, and an increase of NT$0.5 billion in depreciation and amortization expenses from 4G mobile broadband construction and license fees. The increase in our operating costs was partially offset by a
decrease of NT$1.6 billion in interconnection costs.
Internet
Our internet operating costs and expenses decreased by 2.9% from NT$21.3 billion in 2014 to NT$20.6 billion in 2015. This decrease
was primarily due to a decrease of NT$0.6 billion in internet VAS expenses and a decrease of NT$0.5 billion in ICT costs. The decrease in our operating costs was partially offset by an increase of NT$0.6 billion in maintenance and
rental expenses.
78
International fixed communications
Our international fixed communications costs and expenses decreased by 5.6% from NT$17.5 billion in 2014 to NT$16.5 billion in 2015.
The decrease was primarily due to a decrease of NT$0.6 billion in intersegment interconnection costs, a decrease of NT$0.3 billion in depreciation and amortization expenses, a decrease of NT$0.2 billion in personnel expenses and a
decrease of NT$0.2 billion in rental expenses for international communications equipment. The decrease in our operating costs was partially offset by an increase of NT$0.5 billion in operating costs and expenses from our subsidiaries,
Chunghwa Telecom Singapore Pte., Ltd, and Donghwa Telecom Co., Ltd. due to the business growth of these two entities.
Others
The costs and expenses from our other business increased by 9.4% from NT$8.5 billion in 2014 to NT$9.2 billion in 2015. The increase
was primarily due to an increase in personnel expenses from our subsidiary, Honghwa. The increase was partially offset by a decrease in personnel costs and ICT costs of Chunghwa Telecom Co., Ltd.
Other Income and Expenses
We
recorded net other income of NT$0.6 billion in 2014 and net other expenses of NT$0.1 billion in 2015, respectively. The difference between 2014 and 2015 was primarily due to the gain on disposal of investment properties of
NT$0.6 billion in 2014 by our subsidiary, Light Era.
Income from Operations and Operating Margin
As a result of the foregoing, our income from operations increased by 12.4% from NT$44.8 billion in 2014 to NT$50.4 billion in 2015.
Our operating margin increased from 19.8% in 2014 to 21.7% in 2015.
The following table sets forth certain information regarding our
revenues and income before income tax by business segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Fixed
Communications
|
|
|
Mobile
Communications
|
|
|
Internet
|
|
|
International
Fixed
Communications
|
|
|
Others
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
(in billions of NT$)
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
72.5
|
|
|
|
114.9
|
|
|
|
25.8
|
|
|
|
15.5
|
|
|
|
3.1
|
|
|
|
|
|
|
|
231.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment service revenues
|
|
|
21.4
|
|
|
|
3.5
|
|
|
|
4.7
|
|
|
|
2.1
|
|
|
|
3.2
|
|
|
|
(34.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.9
|
|
|
|
118.4
|
|
|
|
30.5
|
|
|
|
17.6
|
|
|
|
6.3
|
|
|
|
(34.9
|
)
|
|
|
231.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income tax
|
|
|
23.3
|
|
|
|
19.4
|
|
|
|
9.9
|
|
|
|
1.1
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
52.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
72.1
|
|
|
|
110.7
|
|
|
|
26.0
|
|
|
|
15.3
|
|
|
|
2.6
|
|
|
|
|
|
|
|
226.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment service revenues
|
|
|
19.7
|
|
|
|
5.3
|
|
|
|
4.7
|
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91.8
|
|
|
|
116.0
|
|
|
|
30.7
|
|
|
|
17.6
|
|
|
|
4.9
|
|
|
|
(34.4
|
)
|
|
|
226.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income before income tax
|
|
|
19.5
|
|
|
|
19.3
|
|
|
|
9.6
|
|
|
|
0.2
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the foregoing, segment income before tax for our domestic fixed communications business
increased by 18.9% from NT$19.5 billion in 2014 to NT$23.3 billion in 2015; segment income before tax for our mobile communications business increased by 0.4% from NT$19.3 billion in 2014 to NT$19.4 billion in 2015; segment
income before tax for our internet business increased by 3.9% from NT$9.6 billion in 2014 to NT$9.9 billion in 2015; segment income before tax for our international fixed communications business increased by 486.4% from NT$0.2 billion
in 2014 to NT$1.1 billion in 2015; and segment loss for our other business segments decreased by 16.3% from NT$2.0 billion in 2014 to NT$1.7 billion in 2015.
79
Non-operating
Income and Expenses
Our
non-operating
income decreased from NT$1.8 billion in 2014 to NT$1.6 billion in 2015.
This decrease was primarily due to a decrease in foreign currency exchange gains and an increase in impairment losses on
available-for-sale
financial assets.
Income Tax
Our income tax was
NT$9.0 billion and NT$9.1 billion in 2014 and 2015, respectively. Our effective tax rate was 19.3% in 2014 and 17.5% in 2015. The decrease in our effective tax rate from 2014 to 2015 was primarily due to a decrease in the accrued 10% tax
on unappropriated earnings. See Item 5. Operating and Financial Review and ProspectsOverviewTaxation for a discussion of the change in tax rate.
Net Income
As a result of the
foregoing, our net income attributable to stockholders of the parent was NT$37.0 billion and NT$42.1 billion in 2014 and 2015, respectively. Our net margin increased from 16.3% in 2014 to 18.2% in 2015.
B. Liquidity and Capital Resources
Liquidity
The following table sets forth the summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
NT$
|
|
|
NT$
|
|
|
NT$
|
|
|
US$
|
|
|
|
(in billions)
|
|
Net cash provided by operating activities
|
|
|
71.4
|
|
|
|
76.3
|
|
|
|
65.0
|
|
|
|
2.0
|
|
Net cash used in investing activities
|
|
|
(27.3
|
)
|
|
|
(30.4
|
)
|
|
|
(21.7
|
)
|
|
|
(0.7
|
)
|
Net cash used in financing activities
|
|
|
(35.1
|
)
|
|
|
(39.2
|
)
|
|
|
(42.5
|
)
|
|
|
(1.3
|
)
|
Effect of exchange rate changes
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Net increase in cash and cash equivalents
|
|
|
9.0
|
|
|
|
6.7
|
|
|
|
0.8
|
|
|
|
0.0
|
|
Cash and cash equivalents at end of year
|
|
|
23.6
|
|
|
|
30.3
|
|
|
|
31.1
|
|
|
|
1.0
|
|
Our primary source of liquidity is cash flow from operations, which represents operating profit adjusted for
non-cash
items, primarily depreciation and amortization and changes in current assets and liabilities. Notes 22 and 23 to our consolidated financial statements, included elsewhere in this annual report, provide
additional details as to our bank loans. We believe that our working capital is sufficient to meet our present cash flow requirements.
In
2016, we generated NT$65.0 billion (US$2.0 billion) in net cash from operating activities as compared to NT$76.3 billion in 2015. The decrease was primarily due to a decrease in income from our operations, an increase in cash outflows for
the contribution to the pension funds according to the minimum contribution requirement in accordance with the revised Labor Standards Law of the ROC which was effective from 2016, and an increase in cash outflows relating to income tax from
operating activities.
In 2015, we generated NT$76.3 billion in net cash from operating activities as compared to
NT$71.4 billion in 2014. The increase was primarily due to an increase in income from our operations, an increase in cash inflows from accounts receivables, an increase in amortization expense, and a decrease in cash outflows relating to income
tax from operating activities.
In 2014, we generated NT$71.4 billion net cash from operating activities as compared to
NT$75.3 billion in 2013. The decrease was primarily due to the decrease in income from operation, the decrease in cash inflows relating to accounts receivables, and the increase in cash outflows relating to income tax and other payables from
operating activities.
80
Historically, net cash from operating activities has been sufficient to cover our capital
expenditures, including ongoing expansion and modernization of our networks.
In 2016, net cash used in investing activities was
NT$21.7 billion (US$0.7 billion), a decrease from NT$30.4 billion in 2015. The change was primarily due to a
one-time
payment of NT$10.0 billion in 2015 for acquiring the 4G mobile broadband
spectrum in the auction held by the NCC, but there was no such cash outflows in 2016.
In 2015, net cash used in investing activities was
NT$30.4 billion, an increase from NT$27.3 billion in 2014. The change was primarily due to a
one-time
payment of NT$10.0 billion in 2015 for acquiring the 4G mobile broadband spectrum in the
auction held by the NCC, which payment was partially offset by a net decrease of NT$7.5 billion for acquisition of property, plant and equipment.
In 2014, net cash used in investing activities was NT$27.3 billion, a decrease from NT$49.1 billion in 2013. The change was
primarily due to the
one-time
payment of NT$39.1 billion in 2013 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC, which was partially offset by a net decrease of
NT$19.7 billion of time deposits and negotiable certificate of deposit with maturities of more than three months.
In 2016, our net
cash used in financing activities totaled NT$42.5 billion (US$1.3 billion), which mainly reflected NT$42.6 billion in dividends paid during that period.
In 2015, our net cash used in financing activities totaled NT$39.2 billion, which mainly reflected NT$37.7 billion in dividends paid
during that period.
In 2014, our net cash used in financing activities totaled NT$35.1 billion, which mainly reflected
NT$18.5 billion of payment of dividends during that period and NT$16.6 billion of cash distribution from our capital surplus to our stockholders.
Capital Resources
We have historically
financed our capital expenditure requirements with our cash flows from operations and some bank loans. In future years, we have capital expenditure requirements for the ongoing expansion and upgrade of our networks, including 4G mobile broadband,
FTTx, service platforms, and IDC. We also expect to make dividend payments on an ongoing basis. See Item 8. Financial InformationA. Consolidated Statements and Other Financial Information. Furthermore, we may require working
capital from time to time to finance purchases of materials for our maintenance and other overhead expenses. We expect to primarily rely on cash generated from operations and, to a lesser extent, loans from commercial banks to meet our planned
capital expenditures, make our planned dividend payments, repay debts and fulfill other commitments over the next twelve months.
As of
December 31, 2016, our primary source of liquidity was NT$31.1 billion (US$1.0 billion) in cash and cash equivalents. In addition, the unused line of credit for unsecured and secured bank loans amounted to NT$46.2 billion (US$1.4
billion) and NT$0.2 billion (US$6.2 million), respectively, as of December 31, 2016.
As of December 31, 2016, our
subsidiary, Chunghwa Sochamp Technology Inc., had short-term unsecured loans of NT$70.0 million (US$2.2 million) at interest rates ranging from 2.14% to 2.25%.
As of December 31, 2016, our subsidiary, Youth Co., Ltd. had short-term unsecured loans of NT$48.0 million (US$1.5 million) at
interest rates ranging from 1.95% to 1.97%; and short-term secured loans of NT$20.0 million (US$0.6 million) with an interest rate at 1.98%.
As of December 31, 2016, our subsidiary Light Era had long-term secured loans in the amount of NT$1.6 billion (US$49.4 million) due
in 2018 with an interest rate at 0.91%.
81
As part of the governments effort to upgrade the existing telecommunications
infrastructure, we and other public utility companies were required by the ROC government to contribute a total of NT$1.0 billion to a Piping Fund, administered by the Taipei City Government. This fund is used to finance various
telecommunications infrastructure projects. We accounted for the contribution as other financial assets on our consolidated balance sheets.
Note 41 to our consolidated financial statements included elsewhere in this annual report provides a description of the assets that are
pledged as collateral for long-term bank loans and contract deposits.
Capital Expenditures
Substantially all of our capital expenditures in 2014, 2015 and 2016 were made for operations in the ROC. We have financed our capital
expenditures using cash flow from operations and bank loans. The following table sets forth a summary of our capital expenditures for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in billions of NT$, except percentages)
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic fixed communications business
|
|
|
16.2
|
|
|
|
50
|
%
|
|
|
10.2
|
|
|
|
41
|
%
|
|
|
9.9
|
|
|
|
42
|
%
|
Mobile communications business
|
|
|
9.6
|
|
|
|
30
|
|
|
|
8.6
|
|
|
|
34
|
|
|
|
9.0
|
|
|
|
38
|
|
Internet business
|
|
|
4.4
|
|
|
|
14
|
|
|
|
4.8
|
|
|
|
19
|
|
|
|
2.7
|
|
|
|
12
|
|
International fixed communications business
|
|
|
1.5
|
|
|
|
4
|
|
|
|
1.0
|
|
|
|
4
|
|
|
|
1.1
|
|
|
|
5
|
|
Others
|
|
|
0.9
|
|
|
|
2
|
|
|
|
0.5
|
|
|
|
2
|
|
|
|
0.8
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
|
32.6
|
|
|
|
100
|
%
|
|
|
25.1
|
|
|
|
100
|
%
|
|
|
23.5
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a summary of our planned capital expenditures for the year ending
December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
Year Ending
December 31,
2017
|
|
|
|
(in billions of NT$,
except percentages)
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Domestic fixed communications business
|
|
|
14.2
|
|
|
|
47.0
|
%
|
Mobile communications business
|
|
|
9.4
|
|
|
|
31.1
|
|
Internet business
|
|
|
3.3
|
|
|
|
10.8
|
|
International fixed communications business
|
|
|
1.8
|
|
|
|
5.8
|
|
Others
|
|
|
1.6
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
|
30.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We expect our total capital expenditures to be approximately NT$30.3 billion in 2017. Our capital
expenditures for 2017 are planned to be allocated to our 4G LTE network deployment, FTTx network expansion, service platforms, cloud computing and IDC construction. We expect to finance these capital expenditures with our cash flows from operations
and bank loans.
Inflation
We do not
believe that inflation in Taiwan has had a material impact on our results of operations in 2014, 2015 and 2016.
82
Recent Accounting Pronouncements
Major differences between IFRSs and Taiwan IFRSs
While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt IFRSs for certain filings with the SEC, including our annual reports on
Form
20-F
for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for SEC filing purposes, we are no longer required to prepare any reconciliation of our consolidated
financial statements with U.S. GAAP.
Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any
new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC. Therefore, these pronouncements will not be applicable to Taiwan IFRSs until endorsed by the FSC. Some of the major differences between IFRSs
and Taiwan IFRSs that are relevant to us as of the date of this annual report are set forth below.
|
|
|
The income taxes on unappropriated earnings should be recognized at the year of earnings under IFRSs, while it should be recognized at the year of distribution under Taiwan IFRSs.
|
|
|
|
Prior to incorporation, according to the laws and regulations applicable to state-owned enterprises in Taiwan, we recorded revenue from fixed-line service at the time the connection service was performed or the prepaid
card was sold. Upon incorporation, net assets greater than capital stock was credited as additional
paid-in
capital. Part of our additional
paid-in
capital was from
unearned revenues from fixed-line services as of that date. Under IFRSs, following the revenue recognition guidance, the above service revenue should be treated as deferred income and recognized over the time when the service is continuously
provided or as consumed. Therefore, upon our first adoption of IFRSs, we should retrospectively decrease additional
paid-in
capital while increase unappropriated earnings on the transition date of
January 1, 2012. There is no difference in the recognition of unearned revenues or deferred income between IFRSs and Taiwan IFRSs. However, according to the guidance released by the TWSE in March 2012, which is a part of Taiwan IFRSs, the
additional
paid-in
capital under ROC GAAP that is not specifically promulgated under Taiwan IFRSs should not be adjusted on the transition date of January 1, 2012. Therefore, we retain such additional
paid-in
capital under Taiwan IFRSs.
|
It is difficult for us to determine the differences
between Taiwan IFRSs and IFRSs on our financial statements as any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC.
Other recent accounting pronouncements under IFRSs
For a summary of new standards, amendments and interpretations issued under IFRSs but not effective for 2016 and which have not been adopted
early by us, see Note 5 to our consolidated financial statements included elsewhere in this annual report.
C. Research and Development, Patents and
Licenses
Research and Development
Our research and development efforts are focused on the development of advanced network services and operation technologies as well as the
development of core technologies for the domestic telecommunications market. For 2014, 2015 and 2016, our research and development expenses were NT$3.5 billion, NT$3.6 billion and NT$3.8 billion (US$0.1 billion), or approximately
1.5%, 1.6% and 1.6% of our revenues, respectively.
83
As of March 31, 2017, we had 2,368 researchers focusing on the following areas:
|
|
|
Convergence Services:
value-add
communications services, intelligent interactive technologies, location-based application technology, content convergence services,
E-commerce,
mobile lifestyle apps, and video convergence services;
|
|
|
|
IoT: intelligent IoT service platform, driving behavioral analysis solutions, intelligent manufacturing solutions, and health cloud services;
|
|
|
|
Information Security: identification solutions and enterprise advanced persistent threat defense solutions;
|
|
|
|
Big Data: big data operations, storage and analysis solutions;
|
|
|
|
Cloud Computing: virtual data center service solutions, integrated surveillance solutions of information and communications equipment; and
|
|
|
|
Intelligent Broadband: LWA solutions, site selection and resource allocation solutions for telecom cloud stations, multiband carrier aggregation technology, VoIP
four-in-one
loading process, and intelligent data traffic forecast.
|
With our
consistent investment in research and development, we have developed a number of advanced network services, operation technologies and VAS which successfully support our business operations and expansion, including our FTTx deployment, security,
mobile payment, smart Home, enterprise ICT solution, cloud business and operation supporting system, and various IoT services, such as ITS, iEN, intelligent video surveillance, or IVS, and the solution of industry 4.0. As of December 31, 2016,
we have been granted 916 domestic patents and 64 foreign patents.
D. Trend Information
See Overview for a discussion of the most significant recent trends that have had, and in the future may have, a material
impact on our results of operations, financial condition and capital expenditures. In addition, see discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably
likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating
results or financial condition.
E.
Off-Balance
Sheet Arrangements
There are no
off-balance
sheet arrangements that are material to investors.
F. Tabular Disclosure of Contractual Obligations
Set forth below are our total contractual obligations as of December 31, 2016.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
(in billions of NT$)
|
|
Contractual Obligations
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term loans
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
Obligations related to
ST-2
satellite
|
|
|
1.8
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.8
|
|
Operating leases
(2)
|
|
|
9.2
|
|
|
|
2.8
|
|
|
|
3.7
|
|
|
|
1.7
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12.7
|
|
|
|
3.1
|
|
|
|
5.7
|
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Unfunded defined benefit obligation is not included as the schedule of payments is difficult to determine. We made pension contributions of approximately NT$11.2 billion (US$0.3 billion) in 2016 and expected to
made pension contributions of approximately NT$2.7 billion (US$0.1 billion) in 2017. See Note 28 to our consolidated financial statements for additional details regarding our pension plan.
|
(2)
|
Operating leases obligations are described in Note 36 to our consolidated financial statements included elsewhere in the annual report.
|
84
As of December 31, 2016, we had remaining commitments under
non-cancelable
contracts with various parties, including acquisition of lands and buildings of NT$0.9 billion (US$26.9 million) and acquisition of telecommunications equipment of NT$12.3 billion
(US$0.4 billion).
Foreign Exchange
Our revenues and costs and expenses are largely denominated in NT dollars. Our principal expenses denominated in foreign currencies are capital
expenditures on telecommunications equipment and settlement payments for the use of networks of carriers in foreign countries for outgoing international calls. Settlement receipts have been a principal source of foreign currency for us. While future
fluctuations of the NT dollar against foreign currencies could impact our financial condition and results of operations, we have not yet been materially affected in the past. See Item 11. Quantitative and Qualitative Disclosures about Market
RiskForeign Currency Risk for further details.
G. Safe Harbor
See Forward-Looking Statements in This Annual Report May Not Be Realized.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and Senior Management
|
Our Articles of Incorporation provides for a board of
directors consisting of seven to fifteen directors bestowed with a three-year tenure. The following table sets forth the name, age and position of each of our directors and such persons position as of March 31, 2017. There is no family
relationship among any of these persons. These directors have terms until June 23, 2019. Pursuant to the ROC Company Act, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A
director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. All of
our
non-independent
directors are representatives of the MOTC.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Yu Cheng
|
|
|
63
|
|
|
Chairman, chief executive officer and director
|
Chi-Mau
Sheih
|
|
|
62
|
|
|
President and director
|
Chih-Ku
Fan
|
|
|
63
|
|
|
Director
|
Shin-Yi
Chang
|
|
|
59
|
|
|
Director
|
Yi-Bing
Lin
|
|
|
56
|
|
|
Director
|
Shu-Juan
Huang
|
|
|
52
|
|
|
Director
|
Jen-Ran
Chen
(1)
|
|
|
58
|
|
|
Director
|
Zse-Hong
Tsai
(1)
|
|
|
56
|
|
|
Director
|
Kuo-Long
Wu
(1)
|
|
|
65
|
|
|
Director
|
Lo-Yu
Yen
(1)
|
|
|
62
|
|
|
Director
|
Chin-Tsai Pan
|
|
|
56
|
|
|
Director
|
(1)
|
Independent director.
|
Yu Cheng
is the chairman, chief executive officer and director
of our company. He is also an independent director of Formosa Petrochemical Co., Ltd., Formosa Taffeta Co., Ltd. and Formosa Advanced Technologies Co., Ltd. Mr. Cheng assumed the role as a director of our company in August 2016. He
was the former CEO of Contemporary Taiwan Development Foundation. He also served as the
editor-in-chief
of Commercial Times from 2009 to 2016, the chairman of Radio
Taiwan International from 2006 to 2008, the president of Taiwan Television Enterprise Ltd. from 2002 to 2006, as well as the commissioner and vice chairman of Fair Trade Commission of Executive Yuan from 1995 to 2002. Mr. Cheng holds a MBA
degree from National Chengchi University.
85
Chi-Mau Sheih
has served as the president and director of our company since January 2017.
Mr. Sheih served as a senior executive vice president of our company from 2010 to 2017, the president of Southern Taiwan Business Group from 2007 to 2010, and the president of Central Taiwan Business Group from 2006 to 2007. Mr. Sheih
holds a masters degree in Business Administration from National Taiwan University.
Chih-Ku
Fan
is a director of our company. Mr. Fan is also currently the deputy
administrative minister of the MOTC. Mr. Fan holds a Ph.D. degree in transportation technology and management from National Chiao Tung University in Taiwan.
Shin-Yi Chang
has served as a director of our company since January 2017. Mr. Chang is also currently the director of the
accounting department at the MOTC. He holds a MBA degree from National Taiwan University.
Yi-Bing
Lin
is a director of our company. Dr. Lin is the vice chancellor of the National
Chiao Tung University of the University System of Taiwan, or the UST. He holds a Ph.D. degree in Computer Science and Engineering from University of Washington in Seattle.
Shu-Juan Huang
is a director of our company. Ms. Huang is also currently the director of the Department of Planning of the
Directorate General of Budget, Accounting and Statistics at the Executive Yuan. Ms. Huang served as our supervisor before June 25, 2013. Ms. Huang holds a bachelors degree in Accounting from Fu Jen Catholic University in Taiwan.
Jen-Ran Chen
is currently an independent director of our company. Mr. Chen is currently the executive board director of
Pixnet Digital Media Technology Co., Ltd., the largest social media in Taiwan, and has been invited to be independent director and consultant for several IT companies and research institutes. He is the
co-founder
and
ex-CEO
of Yam, the very first Chinese search engine, and former president of Chinese Television System. Mr. Chen holds a masters degree in
Sociology from National Taiwan University.
Zse-Hong
Tsai
is an independent director of our
company. Dr. Tsai is also currently a professor of electrical engineering at the National Taiwan University. His research interest includes broadband networking, performance evaluation and telecommunication regulations. Dr. Tsai holds a
Ph.D. degree and a Master of Science degree in Electrical Engineering from the University of California, Los Angeles, and a Bachelor of Science degree in Electrical Engineering from National Taiwan University.
Kuo-Long
Wu
is an independent director of our company. Mr. Wu is also currently the
consultant of the National Information Infrastructure Enterprise Promotion Association. He was a board member of the Internet Corporation for Assigned Names and Numbers from 2010 to 2016. Mr. Wu holds a masters degree in Computer Science
from Columbia University.
Lo-Yu
Yen
is an independent director of our company.
Mr. Yen is the
co-founder
and principal of AAMA Taipei Cradle Program. He is also an independent director of ANZ Bank (Taiwan). Mr. Lo worked at international accounting and consulting firms in
Taiwan, USA and Mainland China for 30 years. He holds a masters degree in Accounting from National Chengchi University. He has CPA certificates both in the ROC and the United States.
Chin-Tsai Pan
is a director of our company. Mr. Pan is currently a representative of the Members Convention of Chunghwa
Telecom Workers Union and an engineer of our Southern Taiwan Business Group. Mr. Pan graduated from Kaohsiung Industrial High School.
The following persons served as directors on our board during 2016 but are no longer serving with us due to retirement and replacement.
Lih-Shyng
Tsai
was the chairman, chief executive officer and director of our company from
January 2014 to August 2016. Dr. Tsai was the chairman and chief executive officer of TSMC Solar Ltd. and TSMC Solid State Lighting Ltd. from 2011 to 2013, the president of TSMCs new business department from 2009 to 2011 and the president
and chief executive officer of TSMC from 2005 to 2009. Dr. Tsai holds a Ph.D. degree in Material Science and Engineering from Cornell University.
86
Mu-Piao
Shih
was the president and director of our
company from June 2013 to January 2017. Mr. Shih served as a senior executive vice president of our company from August 2011 to April 2013, an executive vice president of our company and the manager of our Mobile Business Group from September
2009 to August 2011. Mr. Shih holds a masters degree in Electronic Engineering from National Taiwan University.
Yu-Fen
Hong
was a director of our company from June 2013 to January 2017. Ms. Hong is currently the director of the accounting department at the Ministry of Economic Affairs. She holds a masters
degree from National Chiao Tung University in Taiwan.
Chich-Chiang Fan
was a director of our company from September 9 to
August 2016. Dr. Fan assumed chairmanship of Yuanta Commercial Bank Company Ltd. starting from March 2015, after his term as the chairman of Taiwan High Speed Rail Corporation from 2014 to 2015. Dr. Fan is also the chairman of Taiwan
Futures Exchange starting from July 2010, after his term as the chairman of the Taiwan Depository & Clearing Corporation from 2008 to 2010. Dr. Fan received a Ph.D. degree from the University of Cambridge, United Kingdom, in 1993.
Shih-Peng Tsai
was a director of our company from June 2016 to March 2017. Mr. Tsai is currently a representative of the
Members Convention of Chunghwa Telecom Workers Union. Mr. Tsai graduated from Ta Tung Junior Technological College of Commerce.
The following table sets forth the name, age and position of each of our executive officers and such persons position as of
March 31, 2017. There is no family relationship among any of these persons.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Bo-Yung
Chen
|
|
|
53
|
|
|
Chief financial officer and senior executive vice president
|
Li-Show
Wu
|
|
|
58
|
|
|
Senior executive vice president
|
Kuo-Feng
Lin
|
|
|
61
|
|
|
Senior executive vice president
|
Shyang-Yih
Chen
|
|
|
64
|
|
|
Senior executive vice president
|
Shui-Yi
Kuo
|
|
|
51
|
|
|
Senior executive vice president
|
Ming-Shih Chen
|
|
|
61
|
|
|
President of business group
|
Hui-Min
Wang
|
|
|
64
|
|
|
President of business group
|
Hsiu-Gu
Huang
|
|
|
63
|
|
|
President of business group
|
Yuan-Kuang Tu
|
|
|
61
|
|
|
President of business group
|
Chih-Cheng Chien
|
|
|
56
|
|
|
President of business group
|
Hong-Chan Ma
|
|
|
60
|
|
|
President of business group
|
Bo-Yung
Chen
is our chief financial officer and senior
executive vice president starting from May 2014. He served as the chief financial officer of TSMC Solid State Lighting from 2012 to 2014. Prior to that, he was the chief financial officer and the operation general manager of Ralink Technology Corp.
from 2008 to 2011. He also served as the senior vice president of Silicon Integrated Systems Corp. from 2004 to 2008. Mr. Chen holds a masters degree in Business Administration from University of Pittsburgh.
Li-Show Wu
is a senior executive vice president. Ms. Wu served as the vice president of our Marketing Department from August 2015
to October 2016. Prior to that, she served as the vice president of Enterprise Business Group from September 2012 to August 2015, and the assistant vice president of our Marketing Department from January 2011 to September 2012. Ms. Wu holds a
masters degree in Applied Mathematics from National Chiao Tung University in Taiwan.
Kuo-Feng
Lin
is a senior executive vice president. He was the president of our Mobile Business
Group from May 2012 to November 2016. Mr. Lin served as a deputy manager of our Mobil business group from October 2009 to May 2012. Prior to that, he served as the manager of Taipei Branch, Mobile Business Group from April 2006 to October 2009.
Mr. Lin holds a bachelors degree in Electronic Engineering from National Taipei Institute of Technology.
87
Shyang-Yih
Chen
is a senior executive vice
president of our company and he is also the president of our Telecommunication Laboratories. Mr. Chen served as the president of our Telecommunication Laboratories from August 2015 to March 2017, a senior executive vice president of our company
from August 2014 to August 2015, the president of our Telecommunication Training Institute from March 2012 to August 2014, and an executive vice president of our company and the president of the Data Communication Business Group from September 2006
to March 2012. Mr. Chen holds a masters degree in Electrical Engineering from National Taiwan University.
Shui-Yi
Kuo
is a senior executive vice president. Mr. Kuo was the vice president of our investment department from November 2014 to March 2017. Prior to that, he served as the president of our subsidiary
Light Era from November 2013 to November 2014, and the vice president of our accounting department from March 2008 to November 2013. Mr. Kuo holds a masters degree in Accounting from National Chengchi University.
Ming-Shih Chen
is the president of our Northern Taiwan Business Group. Dr. Chen is also a director of Senao. Prior to that,
Dr. Chen
was the president of our International Business Group from November 2016 to March 2017. Dr. Chen served as the vice president of our Data Communications Business Group from July 2012 to November 2016, the deputy manager of
our Data Communications Business Group from May 2012 to July 2012, the senior managing director of our Information Technology Department from September 2008 to May 2012, and the assistant vice president of our Information Technology Department from
October 2006 to September 2008. Dr. Chen holds a Ph.D. degree in Electrical Engineering from National Tsing Hua University in Taiwan.
Hui-Min Wang
is the president of our Southern Taiwan Business Group since May 2016. Prior to that, he served as a vice president of our
Southern Taiwan Business Group from October 2015 to April 2016, and as the president of our subsidiary Chunghwa Telecom (China), Co., Ltd. from March 2011 to October 2015. Mr. Wang holds a masters degree in Business Administration from
Eastern New Mexico University in the United States.
Hsiu-Gu
Huang
is the president of our
Enterprise Business Group. Mr. Huang is also a director of China Airlines Co., Ltd. He was a senior executive vice president from May 2013 to November 2016. He already served as the president of our Enterprise Business Group from September 2008
to May 2013, and an assistant vice president of our company and a deputy manager of our Enterprise Business Group from January 2007 to September 2008. Mr. Huang holds a masters degree in Management Science from National Chiao Tung
University in Taiwan.
Yuan-Kuang Tu
is the president of our Mobile Business Group. Dr. Tu is also a director of Senao.
Dr. Tu served as the president of Enterprise Business Group from March 2015 to November 2016, the president of Northern Taiwan Business Group from March 2012 to February 2015, the president of Chunghwa Telecom Laboratories from May 2009 to
March 2012, the senior managing director of our Corporate Planning Department from May 2007 to May 2009, and the vice president of Chunghwa Telecom Laboratories from March 2006 to April 2007. Dr. Tu holds a Ph.D. degree in Electrical
Engineering from National Taiwan University.
Chih-Cheng Chien
is the president of our International Business Group. Prior to that,
Dr. Chien
was the vice president of our International Business Group from July 2012 to March 2017, the deputy manager of our International Business Group from May 2012 to July 2012, the deputy manager of our Data Communications Business
Group from February 2011 to May 2012, and the senior managing director of our Customer Services Department from January 2007 to February 2011. Dr. Chien holds a Ph.D. degree in Engineering Technology from National Taiwan University of Science
and Technology.
Hong-Chan Ma
is the president of our Data Communications Business Group. Before being promoted to this position,
Mr. Ma served as the vice president of our Marketing Department from September 2012 to August 2015, and the assistant vice president of our Marketing Department from January 2011 to September 2012. Mr. Ma holds a masters degree in
Management Science from National Chiao Tung University in Taiwan.
The following person served as our executive officer during 2016 but is
no longer serving with us due to retirement and replacement.
88
Fu-Kuei
Chung
was the president of our Northern
Taiwan Business Group. Mr. Chung was our senior executive vice president from August 2015 to October 2016. He previously served as the president of our Data Communications Business Group from March 2012 to August 2015, a deputy manager of our
Data Communications Business Group from September 2010 to March 2012, and the senior managing director of our Corporate Planning Departing from May 2009 to August 2010. Mr. Chung holds the masters degree in Information Management from
National Taiwan University.
Ming-Ching Cheng
was the president of our Northern Taiwan Business Group. Before being promoted to
this position, Mr. Cheng served as a vice president of Mobile Business Group from July 2012 to February 2015. Mr. Cheng holds a bachelors degree in Electrical Engineering from Provincial Kaohsiung Institute of Technology.
Ming-Yuan Lee
was the president of our Southern Taiwan Business Group since November 2013. Prior to that, he served as a vice
president of our Southern Taiwan Business Group from July 2012 to November 2013 and as the deputy manager of our Southern Taiwan Business Group from May 2007 to July 2012. Mr. Lee holds a masters degree in Telecommunications from National
Chiao Tung University in Taiwan.
B. Compensation
The board of directors has set up a compensation committee to be responsible for drafting, approving and periodically reviewing the
compensation proposals for the directors and managers. See C. Board Practices for a discussion of our compensation committee.
|
|
|
the chairman of our board of directors may receive a fixed monthly income of NT$342,900 and a
non-fixed
income, including but not limited to performance-related bonuses or other
rewards, which may not exceed his fixed income. The chairman will not receive any additional compensation for his role as a director;
|
|
|
|
our president may receive a fixed monthly income of NT$335,280 and a
non-fixed
income, including but not limited to performance-related bonuses or other rewards, which may not
exceed his fixed income. The president will not receive any additional compensation for his role as a director;
|
|
|
|
independent directors who concurrently serve in military, public office or hold teaching or administrative post may receive a fixed monthly compensation of NT$8,000, and those who do not concurrently serve in military
or public office or hold teaching or administrative post may receive a monthly compensation of NT$60,000; and
|
|
|
|
directors who serve in military, public office or hold teaching or administrative post may receive a monthly compensation of NT$8,000, and those directors who do not serve in military and public office or hold teaching
or administrative post may receive a monthly compensation of NT$30,000.
|
Our chairman and president to our board of
directors, Yu Cheng and
Chi-Mau
Sheih, respectively, do not receive monthly compensation for acting as our directors because they receive salaries as employees.
The aggregate amount of compensation to our directors and executive officers in 2014, 2015 and 2016 was NT$152,242,029, NT$126,799,952 and
NT$145,980,825 (US$4,505,581.0), respectively. The aggregate amount of compensation in 2016 includes a NT$85,103,585 (US$2,626,653.9) salary payment for directors and executive officers, a NT$12,719,821 (US$392,587.1) pension payment for executive
officers, a NT$42,087,419 (US$1,298,994.4) bonus accrued for directors and a NT$6,070,000 (US$187,345.7) bonus accrued for executive officers. See Item 10. Additional InformationB. Memorandum and Articles of IncorporationDividends
and Distributions for a discussion of the distribution of bonuses and earnings.
All of our
non-independent
directors are legal representatives of the MOTC. The bonus in the amount of NT$44,851,783 (US$1,384,314.3) were paid directly to the MOTC in 2016 because such earnings distributions are not the
individual income of these directors. Independent directors will not receive any earnings distributions.
89
Pursuant to ROC disclosure rules, we have disclosed the compensation range of our directors and
senior management for the fiscal year ended December 31, 2016 as follows, excluding bonus accrued for legal entity the MOTC:
|
|
|
Total Compensation
|
|
Directors
|
Below NT$2,000,000
|
|
Yu Cheng
(2)
,
Chung-Yu
Wang
(1)
,
Zse-Hong
Tsai, Chung-Fern Wu
(1)
,
Tain-Jy
Chen
(1)
,
Yun-Tsai
Chou
(1)
,
Yi-Bing
Lin,
Yu-Fen
Hong
(1)
,
Chih-Ku
Fan, Chich-Chiang Fan
(1)
, Shu-Juan Huang, Shih-Peng Tsai
(1)
,
Lo-Yu
Yen, Jen-Ran Chen,
Kuo-Long
Wu
|
NT$2,000,000 to NT$4,999,999
|
|
None
|
NT$5,000,000 to NT$9,999,999
|
|
Mu-Piao
Shih
(3)
|
Over NT$10,000,000
|
|
Lih-Shyng
Tsai
(4)
|
Total
|
|
17 people
|
(1)
|
This person has ceased to be a director of our company due to resignation and replacement prior to March 31, 2017.
|
(2)
|
This person started to serve as our chief executive officer in December 2016. The compensation in 2016 was paid for his service as a director of our company.
|
(3)
|
This person has ceased to be the president and director of our company due to retirement in January 2017.
|
(4)
|
This person has ceased to be the chairman, a director and chief executive officer of our company due to replacement in December 2016. The compensation was counted as salary for serving as our chief executive officer
prior to the cessation and retirement pension payment.
|
|
|
|
Total Compensation
|
|
Senior Management
|
Below NT$2,000,000
|
|
None
|
NT$2,000,000 to NT$4,999,999
|
|
Li-Show
Wu,
Hui-Min
Wang, Ming-Shih Chen
|
NT$5,000,000 to NT$9,999,999
|
|
Bo-Yung
Chen,
Chi-Mau
Sheih,
Hsiu-Gu
Huang,
Fu-Kuei
Chung
(4)
, Ming-Yuan Lee
(1)(2)
,
Kuo-Feng
Lin, Yuan-Kuang Tu,
Shyang-Yih
Chen, Hong-Chan Ma
|
Over NT$10,000,000
|
|
Ming-Ching Cheng
(1)(3)
|
Total
|
|
13 people
|
(1)
|
Including retirement pension payment.
|
(2)
|
This person has ceased to be a member of the senior management of our company due to retirement in May 2016.
|
(3)
|
This person has ceased to be a member of the senior management of our company due to retirement in November 2016.
|
(4)
|
This person has ceased to be a member of the senior management of our company due to replacement in March 2017.
|
We accrued NT$5,161,732 (US$159,312.7) pension expense for executive officers mentioned above in 2016. See Item 5. Operating and
Financial Review and ProspectsOverviewPersonnel expenses and Note 28 to our consolidated financial statements included elsewhere in this annual report for descriptions about our pension plans. We do not have any service contracts
with any directors providing for any benefits upon termination of employment.
C. Board Practices
We currently have 11 directors, including four independent directors. All of our directors were elected on June 24, 2016 for a term of
three years until June 23, 2019, except for Mr. Yu Cheng,
Mr. Chi-Mau
Sheih,
Mr. Shin-Yi
Chang and Mr. Chin-Tsai Pan, as they were reassigned as
a juristic-person director by MOTC prior to March 31, 2017. Pursuant to the ROC Company Act, the directors may be removed from office at any time by a resolution adopted at a stockholders meeting. The chairman of our board of directors is
elected by our directors. Our chairman presides at all meetings of our board of directors and also has the authority to act as our representative. We have not entered into any contract with any of our directors by which our directors are expected to
receive benefits upon termination of their employment.
90
Our Articles of Incorporation provides for a board of directors consisting of seven to fifteen
directors,
one-fifth
of whom shall be expert representatives. Pursuant to the ROC Company Act, the ROC Securities and Exchange Act and Article
12-1
of our Articles of
Incorporation provides for the election of, starting from the fifth commencement of the board of directors, at least three independent directors out of the
7-to-15-member
board. The term independent director may have a different meaning when used in Taiwan than in other jurisdictions. We have used a nominating process, with the stockholders
choosing the independent directors from the list of nominees. With respect to certain material decisions to be made by our board of directors as specified in the ROC Securities and Exchange Act, including the adoption or amendment to our internal
control system, material loans or guarantees, the issuance of equity-type securities, matters in which directors have personal interests, the appointment and discharge of auditors, approval of financial reports, the appointment and discharge of
financial, accounting or internal auditing officers and other matters prescribed by the ROC FSC, the dissenting opinion or qualified opinion of an independent director is required to be noted in the minutes of the board of directors meeting.
Our audit committee was established in September 2004 in accordance with the rules set forth in the NYSE Listed Company Manual, and was
comprised of three independent directors. See Item 16G. Corporate GovernanceAudit Committee. Starting from the date of the annual general meeting in June 2013, we have established a new audit committee that replaces our supervisors
and our old audit committee in accordance with Paragraph 1, Article
14-4
of the ROC Securities and Exchange Act and our Articles of Incorporation, and as a result, we simultaneously comply with the relevant
rules of the NYSE Listed Company Manual and the relevant rules and regulations in the ROC. Accordingly, our audit committee is currently composed of the four independent directors, namely
Zse-Hong
Tsai,
Mr. Kuo-Long
Wu,
Lo-Yu
Yen and
Jen-Ran
Chen to be the members of the audit committee.
Under the ROC Company Act, a person may serve as our director in his personal capacity or as the representative of another legal entity. A
director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Except
for our four independent directors, all of our directors are representatives of the MOTC.
The business address of our directors and
executive officers is the same as our registered address.
Our audit committee should approve and deal following matters: (i) the
adoption or amendment of the internal control system pursuant to Article
14-1
of the Securities and Exchange Act; (ii) the assessment of the effectiveness of the internal control system; (iii) the
adoption or amendment, pursuant to Article
36-1
of the Securities and Exchange Act, of procedures governing material financial or operational actions, such as acquisition or disposal of assets and derivatives
trading, loaning of funds to others, and endorsements or guarantees for others; (iv) a matter relating to the personal interest of a director; (v) a material asset or derivatives transaction; (vi) a matter relating to significant
loan, endorsement or guarantee arrangement;(vii) the offering, issuance, or private placement of any equity-related securities; (viii) the designation or dismissal of an attesting CPA, or the compensation given thereto; (ix) the
appointment or discharge of a financial, accounting, or internal auditing officer; (x) annual and semi-annual financial reports; (xi) the first and third quarter financial reports; (xii) communicating with our independent auditor;
(xiii) negotiating the conflicts over our financial reports between our management and independent auditor; (xiv) discussing and reporting other financial information and required disclosure under the Securities Exchange Act of 1934 with
our management and independent auditor; (xv) accounting firms annual audit and
non-audit
service items; (xvi) performing
one-self
review each year;
(xvii) evaluating the fairness and rationality of merger and acquisition transactions; and (xviii) any other material matter so required by the Company or the competent authorities. Our board of directors has concluded that
Lo-Yu
Yen is our audit committee financial expert.
In addition to our audit committee, we also have a
corporate strategy committee. Our corporate strategy committee may be composed of five to nine directors. Currently, there are seven directors in the Committee. It is responsible for reviewing and advising on the budgets, financial forecasts,
capital requirements, matters related to investments, business license matters, corporate reorganization, development plans and other major issues affecting our development. The conclusions of the corporate strategy committee are considered at a
subsequent board of directors meeting.
The Article
14-6
of ROC Securities and Exchange Act
requires all listed companies to establish a compensation committee for directors, supervisors and managers compensation, which includes salary, stock options and other rewards, as well as authorizes the Competent Authority (i.e., FSC) to
enact a regulation on the authorities of the compensation committee and the qualifications of its members. Accordingly, our compensation committee is composed of three independent directors
(Zse-Hong
Tsai,
Lo-Yu
Yen and Jen-Ran Chen) and is responsible for drafting, assessing and periodically reviewing the compensation proposals for the directors and managers.
See Item 10. Additional
InformationB. Memorandum and Articles of IncorporationDirectors and Audit Committee.
91
In November 2003, the SEC approved changes to the NYSEs listing standards related to the
corporate governance practices of listed companies. Under these rules, listed foreign private issuers, like us, must disclose any significant ways in which their corporate governance practices differ from those followed by NYSE-listed
non-foreign
private issuers under the NYSEs listing standards. See Item 16G. Corporate Governance. A copy of the significant differences between our corporate governance practices and NYSE
corporate governance rules applicable to
non-foreign
private issuers is also available on our website http://www.cht.com.tw. The information contained on our website is not a part of this annual report.
D. Employees
As of December 31,
2016, we had 32,856 employees on a consolidated basis. Approximately 99% of our employees were based in the ROC. The following table is a breakdown of our employees from 2014 to 2016 on a consolidated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
|
|
|
15,217
|
|
|
|
15,467
|
|
|
|
15,760
|
|
Operations
|
|
|
15,640
|
|
|
|
15,558
|
|
|
|
15,417
|
|
Administrative
|
|
|
1,739
|
|
|
|
1,709
|
|
|
|
1,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,596
|
|
|
|
32,734
|
|
|
|
32,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a breakdown of our employees of Chunghwa Telecom Co., Ltd. from 2014 to 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
|
|
|
13,773
|
|
|
|
13,540
|
|
|
|
13,195
|
|
Operations
|
|
|
8,464
|
|
|
|
8,312
|
|
|
|
8,191
|
|
Administrative
|
|
|
1,298
|
|
|
|
1,289
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,535
|
|
|
|
23,141
|
|
|
|
22,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, approximately 77.03% of our employees of Chunghwa Telecom Co., Ltd. had
university, graduate or post-graduate degrees. To improve our operational efficiency by reducing personnel costs, we offered a number of voluntary retirement programs between June 1, 2000 and December 31, 2014, which resulted in a
reduction of approximately 14,386 employees.
As of December 31, 2016, approximately 99% of our employees on a
non-consolidated
basis were members of our principal labor union. Our collective agreement sets forth work rules, grievance procedures and provides for union participation in performance evaluations and promotion
decisions. Our union members also occupy a majority of the seats on our employee welfare and pension fund committees. We will continue to maintain a good relationship with our labor unions. We strive to have good communication with our employees and
the labor unions by inviting representatives of our labor unions to attend various meetings related to the performance of our employees.
Pursuant to our Articles of Incorporation, our employees are entitled to 1.7% to 4.3% of the distributable earnings as employee compensation.
Our practice in the past to determine the amount of the compensation has been based on the operating results. In the third quarter of 2016, we distributed compensation to our employees of NT$1.9 billion (US$59.5 million).
92
E. Share Ownership
As of March 31, 2017, our directors and executive officers personally held an aggregate 375,335 shares of our common shares, representing
around 0.005% of our outstanding common shares. The following table sets forth information with respect to the beneficial ownership of our common shares as of March 31, 2017 by each of our directors and executive officers.
|
|
|
|
|
|
|
|
|
Name
|
|
Number
|
|
|
%
|
|
Yu Cheng
|
|
|
|
|
|
|
|
|
Chi-Mau
Sheih
|
|
|
72,054
|
|
|
|
|
*
|
Shin-Yi
Chang
|
|
|
|
|
|
|
|
|
Yi-Bing
Lin
|
|
|
|
|
|
|
|
|
Jen-Ran
Chen
|
|
|
|
|
|
|
|
|
Zse-Hong
Tsai
|
|
|
|
|
|
|
|
|
Kuo-Long
Wu
|
|
|
|
|
|
|
|
|
Chin-Tsai Pan
|
|
|
2,000
|
|
|
|
|
*
|
Shu-Juan
Huang
|
|
|
|
|
|
|
|
|
Lo-Yu
Yen
|
|
|
|
|
|
|
|
|
Chih-Ku
Fan
|
|
|
|
|
|
|
|
|
Bo-Yung
Chen
|
|
|
|
|
|
|
|
|
Li-Show
Wu
|
|
|
32,964
|
|
|
|
|
*
|
Kuo-Feng
Lin
|
|
|
42,771
|
|
|
|
|
*
|
Shyang-Yih
Chen
|
|
|
78,840
|
|
|
|
|
*
|
Shui-Yi
Kuo
|
|
|
|
|
|
|
|
|
Ming-Shih Chen
|
|
|
25,641
|
|
|
|
|
*
|
Hui-Min
Wang
|
|
|
1,462
|
|
|
|
|
*
|
Hsiu-Gu
Huang
|
|
|
18,698
|
|
|
|
|
*
|
Yuan-Kuang Tu
|
|
|
81,305
|
|
|
|
|
*
|
Chih-Cheng Chien
|
|
|
19,600
|
|
|
|
|
*
|
Hong-Chan Ma
|
|
|
|
|
|
|
|
|
*
|
Stockholder beneficially owns less than 1.0% of our outstanding common shares.
|
Employee Stock Subscription
Program
Under our Articles of Incorporation, we must reserve up to 10% to 15% of any new shares for subscription by our employees
whenever we issue new shares for cash, unless otherwise approved by the central competent authority.
Our consolidated subsidiary, Senao,
is publicly traded on the TWSE and resolved to grant the stock options plan for its employees to purchase common stock of Senao. As of December 31, 2014, 2015 and 2016, participants in Senaos stock incentive plan had outstanding stock
options to purchase 9.0 million, 7.8 million and 6.6 million common shares of Senao, respectively.
In 2015, our
consolidated subsidiary, CHIEF, which has been a public company since November 17, 2015, granted stock options to its employees entitling them to purchase common stock of CHIEF. As of December 31, 2015 and 2016, participants in
CHIEFs stock incentive plan had outstanding stock options to purchase 2.0 million and 1.9 million common shares of CHIEF.
Our another consolidated subsidiary, CHPT, granted its employees the right to subscribe new shares reserved for employees under cash
injection. See Note 34 to our consolidated financial statements, included elsewhere in this annual report, for additional details regarding CHPTs share-based payment arrangement.
93
ITEM 7.
|
MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
|
A. Major Stockholders
The following table sets forth information known to us with respect to the beneficial ownership of our shares (i) as of March 31,
2017, the most recent practicable date and (ii) as of certain book closure dates in each of the preceding three years, for the stockholders known by us to own at least 5.0% of our outstanding common shares. Beneficial ownership is determined in
accordance with the SECs rules.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
|
As of March 31, 2015
|
|
|
As of March 31, 2016
|
|
|
As of March 31, 2017
|
|
Name
|
|
number
|
|
|
%
|
|
|
number
|
|
|
%
|
|
|
number
|
|
|
%
|
|
|
number
|
|
|
%
|
|
The ROC government
(1)(2)
|
|
|
3,099,602,788
|
|
|
|
39.96
|
|
|
|
3,095,559,716
|
|
|
|
39.90
|
|
|
|
3,123,092,684
|
|
|
|
40.11
|
|
|
|
3,086,749,684
|
|
|
|
39.79
|
|
The MOTC
|
|
|
2,737,718,976
|
|
|
|
35.29
|
|
|
|
2,737,718,976
|
|
|
|
35.29
|
|
|
|
2,737,718,976
|
|
|
|
35.29
|
|
|
|
2,737,718,976
|
|
|
|
35.29
|
|
Fubon Life Assurance Co., Ltd
(2)
|
|
|
450,471,087
|
|
|
|
5.81
|
|
|
|
449,451,087
|
|
|
|
5.79
|
|
|
|
449,451,087
|
|
|
|
5.79
|
|
|
|
389,146,087
|
|
|
|
5.02
|
|
(1)
|
Includes shares held through the MOTC and other government-controlled entities.
|
(2)
|
The information as of July 18, 2013, July 18, 2014, July 19, 2015 and July 23, 2016, the latest book closure date, which were the most recent practicable dates for us to obtain complete ownership
information.
|
As of March 31, 2017, 28 record holders held 29,332,729 ADSs (each representing ten common shares), which
represents approximately 3.8% of our total outstanding common shares. Because many of these ADSs were held by brokers or other nominees, we cannot ascertain the exact number of beneficial shareholders with addresses in the United States.
None of our shareholders has different voting rights from other shareholders. See Item 10. Additional InformationB. Memorandum and
Articles of IncorporationVoting Rights. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
B. Related Party Transactions
We have
not extended any loans or credit to any of our directors or executive officers, and we have not provided guarantees for borrowings by any of these persons. We have not entered into any
fee-paying
contract with
any of these persons for them to provide services not within his or her capacity as a director or executive officer of our company, except that two of our directors who are also our employees receive salaries from our company in their capacity as
our employees.
Please refer to Item 4. Information on the CompanyA. History and Development of the Company for a
discussion of our alliances, acquisitions and investments. Please refer to Notes 3, 15, 16 and 40 to our consolidated financial statements included elsewhere in this annual report for descriptions of Chunghwas subsidiaries, investments
accounted for using equity method, and related party transactions.
On April 1, 2007, Chunghwa entered into an agreement with Senao
making Senao the exclusive distributor of mobile handsets to Chunghwas retail outlets. Under the terms of the agreement, Senao also provides mobile handset sales services in Chunghwas retail outlets, exclusively sells Chunghwas SIM
cards in Senaos own retail stores, and gets commission, subsidies of handset sold and warranties from Chunghwa. For the year ended December 31, 2016, Senao received NT$11.0 billion (US$0.3 billion) from Chunghwa. Chunghwa also sells
mobile handsets and data cards to Senao. For the year ended December 31, 2016, Chunghwa sold mobile handsets and data cards to Senao that amounted to NT$0.8 billion (US$26.1 million).
Honghwa contracted with Chunghwa to provide
on-site
sales services in Chunghwas retail stores
and
on-site
equipment installation services to Chunghwas customers. Chunghwa paid Honghwa approximately NT$4.5 billion (US$0.1 billion) in 2016 for these services.
Chunghwa acquired network equipment and related supplies from Chunghwa System Integration for approximately NT$1.4 billion (US$42.6
million) in 2016.
94
Chunghwa paid Taiwan International Standard Electronics approximately NT$0.8 billion
(US$25.9 million) in 2016 for the purchase of telecommunications exchange facilities and related supplies, and the maintenance expenses.
Terms and conditions of the foregoing transactions with related parties were not significantly different from transactions with
non-related
parties. When no similar transactions with
non-related
parties can be referenced, terms and conditions were determined in accordance with mutual agreements.
C. Interests of Experts and Counsel
Not
applicable.
ITEM 8.
|
FINANCIAL INFORMATION
|
A. Consolidated Statements and Other Financial Information
See Item 18 for a list of all consolidated financial statements filed as part of this annual report on Form
20-F.
We are not currently involved in material litigation or other proceedings that may have or
have had in the recent past, significant effects on our financial position or profitability, see Item 4. Information on the CompanyB. Business OverviewLegal Proceedings.
For our policy on dividend distributions, see Item 10. Additional InformationB. Memorandum and Articles of
IncorporationDividends and Distributions. The following table sets forth the dividends declared on each of our common shares and in the aggregate for each of the years from 2012 to 2016. All of these dividends were paid, in the fiscal
year following the period with respect to which the dividends relate.
|
|
|
|
|
|
|
|
|
|
|
Dividends Per
Common Share
(1)
|
|
|
Total Dividends
(1)
|
|
|
|
NT$
|
|
|
NT$ in billions
|
|
Year ended December 31, 2012
(2)
|
|
|
4.63
|
|
|
|
35.9
|
|
Year ended December 31, 2013
(3)
|
|
|
2.39
|
|
|
|
18.5
|
|
Year ended December 31, 2014
|
|
|
4.86
|
|
|
|
37.7
|
|
Year ended December 31, 2015
|
|
|
5.49
|
|
|
|
42.6
|
|
Year ended December 31, 2016
(4)
|
|
|
4.94
|
|
|
|
38.3
|
|
(1)
|
Cash dividend unless otherwise indicated.
|
(2)
|
In addition to the cash dividends from unappropriated earnings disclosed in the table above, we also made cash distributions from additional
paid-in
capital of NT$0.72 per share,
which amounted to an aggregate of NT$5.6 billion.
|
(3)
|
In addition to the cash dividends from unappropriated earnings disclosed in the table above, we also made cash distributions from additional
paid-in
capital of NT$2.14 per share,
which amounted to an aggregate of NT$16.6 billion. See Item 5. Operating and Financial Review and ProspectsOverviewEffect of adopting Taiwan IFRSs on our dividends and employee bonuses.
|
(4)
|
Dividends for 2016, which are calculated based on Taiwan IFRSs, were approved by the board of directors in March 2017 and are expected to be declared at our annual general stockholders meeting scheduled on
June 23, 2017. The accumulated legal reserve that we had set aside in the past years has amounted to the aggregate par value of our outstanding share capital. Therefore, according to the relevant regulations, we are not required to appropriate
profits as legal reserve starting from 2016. Our payout ratio was 95.7% in 2016 after the adjustment of unappropriated earnings and the appropriation of special reserve.
|
We are committed to maximizing stockholder value and intend to maintain a sustainable dividend policy, subject to a number of commercial
factors, including the interests of our stockholders, cash requirements for future capital expenditures and investments, as well as relevant industry and market practice. The amount of our net income determined for purposes of calculating our annual
dividend payout will be calculated based on Taiwan IFRSs, which may differ from the amount of our net income determined in accordance with IFRSs.
95
B. Significant Changes
Other than as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of the annual
consolidated financial statements included in this annual report.
ITEM 9.
|
THE OFFER AND LISTING
|
A. Offer and Listing Details
Market Price Information for Our Common Shares
Our common shares have been listed on the TWSE since October 27, 2000. There is no public market outside Taiwan for our common shares. The
table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the TWSE for our common shares. The closing price for our common shares on the TWSE on April 18, 2017 was NT$104.00 per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Price
Per Common Share
(1)
|
|
|
Average
Daily Trading
Volume
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
NT$
|
|
|
NT$
|
|
|
(in thousands)
|
|
2012
|
|
|
81.42
|
|
|
|
70.70
|
|
|
|
11,753
|
|
2013
|
|
|
87.57
|
|
|
|
78.59
|
|
|
|
7,498
|
|
2014
|
|
|
89.35
|
|
|
|
81.59
|
|
|
|
6,307
|
|
2015
|
|
|
100.50
|
|
|
|
87.93
|
|
|
|
8,292
|
|
First Quarter
|
|
|
94.86
|
|
|
|
87.93
|
|
|
|
7,366
|
|
Second Quarter
|
|
|
94.67
|
|
|
|
90.97
|
|
|
|
6,177
|
|
Third Quarter
|
|
|
99.30
|
|
|
|
92.87
|
|
|
|
11,510
|
|
Fourth Quarter
|
|
|
100.50
|
|
|
|
97.30
|
|
|
|
7,942
|
|
2016
|
|
|
118.50
|
|
|
|
93.82
|
|
|
|
11,059
|
|
First Quarter
|
|
|
110.50
|
|
|
|
98.20
|
|
|
|
10,744
|
|
Second Quarter
|
|
|
116.50
|
|
|
|
107.00
|
|
|
|
7,982
|
|
Third Quarter
|
|
|
118.50
|
|
|
|
110.50
|
|
|
|
11,624
|
|
Fourth Quarter
|
|
|
112.50
|
|
|
|
101.00
|
|
|
|
13,621
|
|
October
|
|
|
112.50
|
|
|
|
108.00
|
|
|
|
13,179
|
|
November
|
|
|
110.00
|
|
|
|
104.00
|
|
|
|
14,346
|
|
December
|
|
|
106.50
|
|
|
|
101.00
|
|
|
|
13,298
|
|
2017 (through April 18)
|
|
|
106.00
|
|
|
|
100.00
|
|
|
|
9,942
|
|
First Quarter
|
|
|
106.00
|
|
|
|
100.00
|
|
|
|
10,602
|
|
January
|
|
|
104.50
|
|
|
|
101.00
|
|
|
|
9,716
|
|
February
|
|
|
102.00
|
|
|
|
100.00
|
|
|
|
12,545
|
|
March
|
|
|
106.00
|
|
|
|
101.50
|
|
|
|
9,697
|
|
Second Quarter(through April 18)
|
|
|
104.50
|
|
|
|
103.50
|
|
|
|
6,182
|
|
April (through April 18)
|
|
|
104.50
|
|
|
|
103.50
|
|
|
|
6,182
|
|
(1)
|
The historical prices and volumes of our common shares traded on the TWSE have been adjusted based on prior cash dividend payments, capital increases and capital reductions.
|
Market Price Information for Our American Depositary Shares
Our ADSs have been listed on the NYSE under the symbol CHT since July 17, 2003. The outstanding ADSs are identified by the
CUSIP number 17133Q502. The table below shows, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the NYSE for our ADSs. The closing price for our ADSs on the NYSE on April 18, 2017 was
US$33.95 per ADS. Each of our ADSs represents the right to receive ten shares.
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Price Per ADS
(1)
|
|
|
Average ADS
Daily Trading
Volume
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
US$
|
|
|
US$
|
|
|
(in thousands)
|
|
2012
|
|
|
28.06
|
|
|
|
23.93
|
|
|
|
355
|
|
2013
|
|
|
29.64
|
|
|
|
26.43
|
|
|
|
206
|
|
2014
|
|
|
29.99
|
|
|
|
26.50
|
|
|
|
111
|
|
2015
|
|
|
31.58
|
|
|
|
27.66
|
|
|
|
186
|
|
First Quarter
|
|
|
30.58
|
|
|
|
27.66
|
|
|
|
128
|
|
Second Quarter
|
|
|
31.09
|
|
|
|
29.54
|
|
|
|
116
|
|
Third Quarter
|
|
|
31.58
|
|
|
|
29.20
|
|
|
|
284
|
|
Fourth Quarter
|
|
|
31.18
|
|
|
|
29.40
|
|
|
|
213
|
|
2016
|
|
|
37.38
|
|
|
|
28.24
|
|
|
|
262
|
|
First Quarter
|
|
|
34.22
|
|
|
|
29.57
|
|
|
|
257
|
|
Second Quarter
|
|
|
38.41
|
|
|
|
35.03
|
|
|
|
214
|
|
Third Quarter
|
|
|
37.38
|
|
|
|
34.64
|
|
|
|
215
|
|
Fourth Quarter
|
|
|
35.42
|
|
|
|
31.36
|
|
|
|
316
|
|
October
|
|
|
35.42
|
|
|
|
34.15
|
|
|
|
324
|
|
November
|
|
|
34.90
|
|
|
|
32.71
|
|
|
|
401
|
|
December
|
|
|
33.59
|
|
|
|
31.36
|
|
|
|
223
|
|
2017 (through April 18)
|
|
|
34.82
|
|
|
|
31.37
|
|
|
|
299
|
|
First Quarter
|
|
|
34.82
|
|
|
|
31.37
|
|
|
|
313
|
|
January
|
|
|
32.79
|
|
|
|
31.49
|
|
|
|
285
|
|
February
|
|
|
33.16
|
|
|
|
31.37
|
|
|
|
429
|
|
March
|
|
|
34.82
|
|
|
|
32.78
|
|
|
|
242
|
|
Second Quarter (through April 18)
|
|
|
34.27
|
|
|
|
33.65
|
|
|
|
216
|
|
April (through April 18)
|
|
|
34.27
|
|
|
|
33.65
|
|
|
|
216
|
|
(1)
|
The historical prices and volumes of our ADSs traded on the NYSE have been adjusted based on prior cash dividend payments, capital increases and capital reductions.
|
As of April 18, 2017, a total of 28,772,429 ADSs and 7,757,446,545 common shares (including those represented by ADSs) were outstanding. With
certain limited exceptions, holders of shares that are not ROC persons are required to hold these shares through a brokerage or custodial account in the ROC.
B. Plan of Distribution
Not applicable.
C. Markets
The principal trading
market for our common shares is the TWSE and the principal trading market for our ADSs is the NYSE.
D. Selling Stockholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
A. Share Capital
Not applicable.
97
B. Memorandum and Articles of Incorporation
Set forth below is information relating to our capital structure, including brief summaries of material provisions of our Articles of
Incorporation, the ROC Securities and Exchange Law, the ROC Company Act, and the Telecommunications Act, all as currently in effect. The following summaries are qualified in their entirety by reference to our Articles of Incorporation, the ROC
Securities and Exchange Law, the ROC Company Act, and the Telecommunications Act.
Objects and Purpose
The scope of business of Chunghwa Telecom Co., Ltd. as set forth in Article 2 of our Articles of Incorporation, includes
(i) telecommunications Enterprise Type 1 and Type 2 businesses pursuant to the Telecommunications Act of the ROC, (ii) installation of the computer equipment and radio-frequency equipment whose operation is controlled by the
telecommunication business, (iii) telecommunications equipment wholesale, retail and engineering businesses, (iv) engineering and operation of information software and information process service businesses, (v) apparatus and electric
appliance installation and construction business, (vi) television program production, distribution and commercial business, (vii) broadcasting program distribution and commercial business, (viii) the third party payment business,
(ix) water pipe construction business, (x) machinery and equipment manufacturing business, and (xi) other businesses, except any business requiring a special permit or otherwise restricted by law or regulation.
General
Under our Articles of
Incorporation, our authorized capital was NT$120,000,000,000 divided into 12,000,000,000 common shares, with par value of NT$10 per share. We have set aside 200,000,000 common shares from the aforementioned common shares for the exercise of any
future issuances of stock warrants, preferred shares with warrants, and bonds with warrants. Our
paid-in
capital is NT$77,574,465,450 divided into 7,757,446,545 common shares. We currently do not have any
other equity in the form of preferred shares, bonds or otherwise outstanding as of the date of this annual report.
The MOTC, on behalf of
the government of the ROC, owned approximately 35.29% of our outstanding common shares as of December 31, 2016. The remainder of our outstanding shares is held by public stockholders and other investors.
Directors and Audit Committee
Our
Articles of Incorporation provide for a board of directors consisting of seven to fifteen directors, and
one-fifth
of these directors shall be professionals of domain knowledge. See Item 6. Directors,
Senior Management and EmployeesC. Board Practices. Pursuant to Article
14-4
of the ROC Securities and Exchange Act, for a company that has established an audit committee, unless otherwise provided
for by law, the provisions regarding supervisors in ROC Securities and Exchange Act, the ROC Company Act, and other laws and regulations shall apply mutatis mutandis to the audit committee.
Under the ROC Company Act, our board of directors, in conducting our business, shall act in accordance with laws and regulations, our Articles
of Incorporation and the resolutions adopted at the meetings of stockholders. Where any resolution adopted by our board of directors contravenes laws, our Articles of Incorporation and the resolutions adopted at the meetings of stockholders, thereby
causing loss or damage to us, all directors taking part in the adoption of such resolution shall be liable to compensate us for such loss or damage; however, those directors whose disagreement appears on record or is expressed in writing shall be
exempted from liability.
If our board of directors decides, by resolution, to commit any act in violation of any law or our Articles of
Incorporation, any of our independent directors or any stockholder who has continuously held our shares for a period of one year or longer may request our board of directors to discontinue such act. One or more stockholders who have held more than
3% of our issued and outstanding shares for over one year may send a written request to require an independent director to bring an action on our behalf against a director for losses suffered by us as a result of unlawful actions. In addition, if
our stockholders meeting resolves to institute an action against a director, we shall, within 30 days from the date of such resolution, institute the action. In case of a lawsuit between us and a director, an independent director shall act on
our behalf, unless otherwise provided by law; and our stockholders meeting may also appoint some other person to act on our behalf in a lawsuit.
98
According to the ROC Company Act, our board of directors owes fiduciary duty to us. Our directors
are liable for the damages to be sustained by us if they breach their fiduciary duty. In addition, a director who has a personal interest in a matter to be discussed at the meeting of the board of directors, shall specify such conflict; if the
conflict may cause damages to the company, the director shall abstain from voting on the matter, and shall not serve as a proxy and vote on behalf of another director.
According to our Articles of Incorporation, the remuneration and compensation of the directors shall be determined by the board of directors
based on the participation and the contribution of each director in the business operation of the Company and referencing the regular standards of other corporations in the similar industry. Our Articles of Incorporation do not impose a mandatory
retirement age for our directors. Furthermore, our Articles of Incorporation do not impose a shareholding qualification for each director. According to our Code of Ethics, we may not extend any loan to our directors.
Dividends and Distributions
At each
annual general stockholders meeting, our board of directors submits to the stockholders for their approval any proposal for the distribution of dividend or the making of any other distribution to stockholders from our net income for the
preceding fiscal year. All common shares outstanding and fully paid as of the relevant record date are entitled to share equally in any dividend or other distribution so approved. Dividends may be distributed in cash, in the form of common shares or
a combination of the two, as determined by the stockholders at the meeting.
We are not permitted to distribute dividends or make other
distributions to stockholders in any year in which we do not have any net income or unappropriated earnings (excluding reserves). The ROC Company Act also requires that 10% of our annual net income, less prior years losses and outstanding tax,
if any, be set aside as a legal reserve until the accumulated legal reserve equals our
paid-in
capital. We may also set aside special reserve by the resolution of our stockholders meeting. In addition,
our Articles of Incorporation provide that at least 50% of the remaining portion of the net income, less accumulated losses, outstanding taxes, the legal reserve and any special reserve, plus accumulated retained earnings from prior years will be
distributed as dividends to stockholders. Under our Articles of Incorporation, not less than 50% of the total amount of the distributed dividends must be in cash, but if the cash dividends to be distributed are less than NT$0.10 per share, the
dividends may be distributed in the form of shares. The actual percentage of distribution would take actual profitability of the year, capital budgeting, and status of finance into consideration, and would be executed following a resolution of
shareholders meeting. According to the ROC Company Act amended as of May 20, 2015, earnings can no longer be distributed to employees. Rather, earnings may be distributed to shareholders, excluding employees and directors. To mitigate the
impact on employees lost potential earnings, the amended ROC Company Act provides that the company must stipulate a specific amount or percentage of profits to be distributed to employees as compensation. The compensation may, subject to a
resolution which is adopted by a majority vote at a meeting of the board of directors attended by
two-third
of total number of directors, be distributed to employees in way of cash or shares. In addition, a
report of such distribution shall be submitted to the shareholders meeting. As a result, we amended our Articles of Incorporation at our annual general stockholders meeting on June 24, 2016. Pursuant to our current Articles of
Incorporation, in annual profit-making year, we should distribute 1.7% to 4.3% of profit as employees compensation, and not more than 0.17% of profit should be distributed as directors compensation; however, if we have any accumulated
losses, an amount to offset losses should be reserved in advance. The changes do not have a material impact on our financial results, because we have categorized employee bonuses as an expense instead of as distributable earnings since 2008 in
accordance with a clarification letter issued by the Ministry of Economic Affairs of Taiwan for the explanation of Article 64 of the Business Accounting Law.
Under the ROC Company Act, if we do not incur a loss, we are permitted to make distributions on a pro rata basis to our stockholders of
additional common shares or cash by the legal reserve, the premium derived from the issuance of new shares and the income from endowments received by us. We are allowed to make the above distributions to our stockholders by legal reserve only if the
legal reserve exceeds 25% of our
paid-in
capital. Furthermore, subject to the provision under our Articles of Incorporation, such distribution should firstly be made by the premium derived from the issuance of
new shares.
99
Changes in Share Capital
Under the ROC Company Act, any change in our authorized share capital requires an amendment to our Articles of Incorporation, which in turn
requires approval at our stockholders meeting. Authorized but unissued common shares may be issued, subject to applicable ROC law, upon terms as our board of directors may determine.
Preemptive Rights
Under the ROC Company
Act and our Articles of Incorporation, when we issue new shares for cash, unless otherwise approved by the central competent authority, our employees have rights to subscribe for between 10% and 15% of the new issue, and we have rights to restrain
the shares subscribes by employees from being transferred within a specific period of time, which should not be longer than two years. Except for the shares reserved in accordance with the ROC Company Act, we are required to inform our existing
shareholders of their rights to subscribe for additional shares pro rata to their respective shareholding and to note that the shareholders will lose their
pre-emptive
right if they fail to subscribe for the
new shares within the prescribed period. In the event that there is any new share that has not been subscribed by the existing shareholders pursuant to their respective
pre-emptive
rights, we may offer such
shares to other investors through public offering or private negotiation with any person designated by us.
In addition, in accordance
with the ROC Securities and Exchange Act, a public company that intends to offer new shares for cash must offer to the public at least 10% of the shares to be sold except in certain limited circumstances. This percentage can be increased by a
resolution passed at a stockholders meeting, held in accordance with the Company Act and our Articles of Incorporation which would diminish the number of new shares subject to the preemptive rights of existing stockholders.
Meetings of Stockholders
Pursuant to the
ROC Securities and Exchange Act, as a listed company, we must hold a general shareholders meeting within six months after the end of each fiscal year and may not seek any extension for such meeting accordingly to Article 36 of Securities and
Exchange Act. These meetings are generally held in New Taipei City, Taiwan. Special stockholders meetings may be convened by resolution of the board of directors or by the board of directors upon the written request of any stockholder or
stockholders who have held 3% or more of the outstanding common shares for more than one year. Stockholders meetings may also be convened by an independent director. Notice in writing of general meetings of stockholders, stating the place,
time and agenda must be dispatched to each stockholder at least 30 days, in the case of general meetings, and 15 days, in the case of special meetings, before the date set for each meeting. Except in certain circumstances described below, a majority
of the holders of all issued and outstanding common shares present at a stockholders meeting constitutes a quorum for meetings of stockholders. Stockholders of 1% or more of our issued and outstanding shares are entitled to submit, during the
period of time prescribed by us no less than ten days, one written proposal each year for consideration at our annual general stockholders meeting in accordance with the ROC Company Act.
Voting Rights
As previously required by
the ROC Company Act, our Articles of Incorporation provide that a holder of common shares has one vote for each common share. Cumulative voting applies to the election of our directors. The election of independent and
non-independent
directors should be held simultaneously while the ballots for the election of directors and independent directors are cast separately. According to Article
146-1
of the Insurance Act of the ROC, insurance companies that hold our shares may not be our directors or vote for the election of our directors.
100
In general, a resolution can be adopted by the holders of at least a majority of the common
shares represented at a stockholders meeting at which the holders of more than half of all issued and outstanding common shares are present. Under the ROC Company Act, the approval by at least a majority of the common shares represented at a
stockholders meeting in which a quorum of at least
two-thirds
of all issued and outstanding common shares are represented is required for major corporate actions, including:
|
|
|
amendment to our Articles of Incorporation;
|
|
|
|
entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations;
|
|
|
|
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;
|
|
|
|
distribution of any share dividend;
|
|
|
|
merger or
spin-off;
and
|
Alternatively, the ROC Company Act provides that in the case of a
public company, such as us, a resolution may be adopted by the holders of at least
two-thirds
of the common shares represented at a meeting of stockholders at which holders of at least a majority of issued and
outstanding common shares are present.
A stockholder may be represented at a general or special meeting by proxy if a valid proxy form is
delivered to us five days before the commencement of the general or special stockholders meeting. Except for trust enterprises or share registrar approved by the Securities and Futures Bureau of the FSC, where one person is appointed as proxy
by two or more stockholders who together hold more than 3% of the total issued common shares, the votes of those stockholders in excess of 3% of the outstanding common shares shall not be counted. Alternatively, if the stockholder would like to
exercise its voting right at a general or special meeting but cannot be present at the meeting in person, according to the regulations promulgated by the FSC on February 20, 2012, starting from our 2012 general meeting, we are required to set
up an electronic voting mechanism for such stockholder to exercise voting right. The stockholder is not allowed to exercise voting right through electronic voting mechanism if such stockholder fails to revoke the granted proxy (if any) at least two
days prior to the general or special meeting.
At the time of any vote, if a director of a public company has pledged more than half of
the holding at the time the director was elected, such director will not be allowed to exercise the voting rights with respect to the number of shares pledged in excess of the half of the number of shares that such director held in such public
company at the time the director was elected. The maximum number of shares ineligible for voting pursuant to the provision above cannot exceed half of the number of shares that such director held in such public company at the time the director was
elected. In addition, any shares that were ineligible for voting pursuant to the above provision would not count as being present for such vote.
Any stockholder who has a personal interest in the matter under discussion at a stockholders meeting, the outcome of which may impair
our interests, shall not vote or exercise voting rights on behalf of another stockholder; however, the shares held by such stockholder may be counted as present for calculation of attendance quorum.
Holders of our ADSs generally will not be able to exercise voting rights on the common shares underlying ADSs on an individual basis.
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Other Rights of Stockholders
Under the ROC Company Act, dissenting stockholders are entitled to appraisal rights in certain major corporate actions, such as a planned
transfer of the whole or part of the business or a proposed merger by us. A dissenting stockholder may request us to purchase back all of the shares owned by the stockholder at a fair price determined by mutual agreement or determined by the court
if a mutual agreement cannot be reached. Stockholders may exercise their appraisal rights by serving notice in writing to us prior to the related stockholders meeting and/or by raising his objection at the stockholders meeting. Moreover,
a stockholder has the right to file a petition in the court for annulment of any resolution adopted at a stockholders meeting where the procedures for convening the stockholders meeting or the method of adopting the resolutions at the
meeting is contrary to law or our Articles of Incorporation. One or more stockholders who have held more than 3% of the issued and outstanding shares of a company continuously for more than one year may require an independent director to institute,
on behalf of us, an action against a director. In addition, one or more stockholders who has/have continuously held 3% or more of the total number of the outstanding shares of our company for more than one year may require the board of directors to
convene a special stockholders meeting by sending a written request to the board of directors.
The ROC Company Act provides that a
company may adopt a nomination procedure for election of directors. We have adopted a nomination procedure for election of directors as stipulated in our Articles of Incorporation which provides that stockholders holding 1% or more of our total
issued shares may submit to us a list of candidates for director, including independent director, along with relevant information and supporting documents.
Register of Stockholders and Record Dates
Our share registrar, Yuanta Securities Co., Ltd., maintains our register of stockholders at its offices in Taipei, Taiwan. Under the ROC
Company Act, we may, by giving advance public notice, set a record date and close the register of stockholders for a specified period in order for us to determine the stockholders or pledgees that are entitled to rights pertaining to the common
shares. The specified period starting from such record date (to determine the entitled stockholders or pledgees) required is as follows:
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general stockholders meeting60 days;
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special stockholders meeting30 days; and
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relevant record date for distribution of dividends or other entitlements5 days.
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Annual Consolidated
Financial Statements
At least ten days before the annual general stockholders meeting, our annual consolidated financial
statements prepared in accordance with Taiwan IFRSs, the business report, and the earnings distribution or losses offsetting proposal, must be available at our principal office in Taipei, Taiwan for inspection by the stockholders.
Transfer of Common Shares
Under the
current ROC Company Act, a public company, such as our company, may issue individual share certificates, one master certificate or no certificate at all, to evidence common shares. In accordance with our Articles of Incorporation, all of our shares
are currently issued and transferred in book-entry form instead of issuing physical share certificates. After the book closure date, the Taiwan Depository & Clearing Corporation, or the TDCC, will deliver the names and addresses of the
shareholders as of the book closure date to our registrar, Yuanta Securities Co., Ltd. Only shareholders as of the book closure date can assert shareholder rights against us.
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Acquisition of Our Own Common Shares
Under the ROC Company Act, with minor exceptions, we cannot acquire our own common shares. Any common shares acquired by us, under certain of
such minor exceptions, must be sold at the market price within six months after their acquisition.
In addition, under the Republic of
China Securities and Exchange Act, a company whose shares are listed on the TWSE or traded on the Taipei Exchange (formerly known as Gre Tai Securities Market) may, pursuant to a board resolution adopted by a majority consent at a meeting attended
by more than
two-thirds
of the directors and pursuant to the procedures prescribed by the Securities and Futures Bureau of the FSC, purchase its shares for the following purposes on the TWSE, the Taipei
Exchange or by a tender offer:
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(1)
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for transfers of shares to its employees;
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(2)
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for conversion into shares from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us; and
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(3)
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for maintaining its credit and its stockholders equity, provided that the shares so purchased shall be cancelled thereafter.
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The total shares purchased by us shall not exceed 10% of its total issued and outstanding shares. In addition, the total amount for purchase
of the shares shall not exceed the aggregate amount of the retained earnings, the premium from shares issues and the realized portion of the capital surplus.
The shares purchased by us pursuant to items (1) and (2) above shall be transferred to the intended transferees within three years after
the purchase; otherwise the same shall be cancelled. For the shares to be cancelled pursuant to item (3) above, we shall complete amendment registration for such cancellation within six months after the purchase.
The shares purchased by us shall not be pledged or hypothecated. In addition, we may not exercise any stockholders rights attaching to
these shares. Under ROC Company Act, we may transfer the treasury stock to our employees and impose transfer restrictions on the shares up to two years.
Liquidation Rights
In the event of our
liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed pro rata to the stockholders in accordance with the relevant provisions of the ROC Company Act.
Substantial Stockholders and Transfer Restrictions
The ROC Securities and Exchange Act currently requires for public companies that (i) each director, supervisor, manager, as well as their
respective spouses, minor children and nominees, and substantial stockholder (i.e., a stockholder who together with his or her spouse, minor children or nominees, holds more than 10% of the shares of a public company) to report any change in that
persons shareholding to the issuer of the shares on a monthly basis and (ii) each director, supervisor, manager or substantial stockholder holding such common shares for more than a six month period to report his or her intent to transfer
any shares listed on the TWSE or traded on the Taipei Exchange (formerly known as Gre Tai Securities Market) to the Securities and Futures Bureau of the FSC at least three days before the intended transfer, unless the number of shares to be
transferred each day is no more than 10,000 shares. ADS holders holding more than 10% of our common shares, including common shares represented by ADSs, may be subject to the above-mentioned obligations.
In addition, the number of shares that can be sold or transferred on the TWSE or the Taipei Exchange (formerly known as Gre Tai Securities
Market) by any person subject to the restrictions described above on any given day may not exceed:
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0.2% of the outstanding shares of the company in the case of a company with no more than 30 million outstanding shares;
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0.2% of 30 million shares plus 0.1% of the outstanding shares exceeding 30 million shares in the case of a company with more than 30 million outstanding shares; or
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in any case, 5% of the average daily trading volume (number of shares) on the TWSE or the Taipei Exchange for the ten consecutive trading days preceding the reporting day on which day the director, supervisor, manager
or substantial stockholder or their respective spouse, minor child or nominee reports the intended share transfer to the Securities and Futures Bureau.
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These restrictions do not apply to block trading, auction sale, purchase by auction, after-hour trading and sales or transfers of our ADSs.
However, these restrictions will apply to sales of common shares upon withdrawal.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described elsewhere in this
annual report.
D. Exchange Controls
Foreign
Investment and Exchange Controls in Taiwan
We have extracted from publicly available documents the information presented in this
section. Please note that citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations, which are not discussed in this section.
General
Historically, foreign
investments in the securities market of Taiwan were restricted. However, commencing in 1983, the Taiwan government has from time to time enacted legislation and adopted regulations to make foreign investment in the Taiwan securities market possible.
Initially, only overseas investment trust funds of authorized securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualified foreign institutional
investors are allowed to make investments in the Taiwan listed securities market. Since March 1, 1996, overseas Chinese,
non-resident
foreign institutional and individual investors (other than qualified
foreign institutional investors), called general foreign investors, are permitted to make direct investments in the Taiwan securities market.
Foreign Investment in Taiwan Securities Market
On December 28, 1990, the Executive Yuan, the cabinet of the ROC government, approved guidelines drafted by the Securities and Futures
Commission (the predecessor of the Securities and Futures Bureau), which, since January 1, 1991, has allowed direct foreign investment in Taiwans securities that are listed on the TWSE or other Taiwan securities approved by the Securities
and Futures Bureau by certain eligible qualified foreign institutional investors.
In addition to qualified foreign institutional
investors, certain individual and foreign institutional investors which meet certain qualifications set by the Securities and Futures Bureau may invest in the shares of TWSE-listed companies, the Taipei Exchange (formerly known as Gre Tai Securities
Market) traded companies, emerging market companies or other Taiwan securities approved by the Securities and Futures Bureau up to a limit of US$50 million (in the case of institutional investors) and US$5 million (in the case of
individual investors) after obtaining permission from the TWSE.
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On September 30, 2003 and June 15, 2004, the Securities and Futures Bureau issued
amendments to the Guideline Governing Investment in Securities by Overseas Chinese and Foreign Nationals and relevant regulations, in which the Securities and Futures Bureau lifted certain restrictions and simplified the procedures
required for foreign investments in Taiwans securities market. The amendment focuses mainly on the following aspects:
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The concept of qualified foreign institutional investors no longer exists. Foreign investors are reclassified as
off-shore
foreign institutional investors,
on-shore
foreign institutional investors,
off-shore
general foreign investors, and
on-shore
general
foreign investors based on whether they are institutions or natural persons, and whether they have presence in Taiwan.
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For foreign investors to invest in Taiwans securities market, registration with the TWSE, instead of the approval of the Securities and Futures Bureau, is required. The TWSE may withdraw or rescind the
registration if the application documents submitted by foreign investors are untrue or incomplete, or if any material violation of the relevant regulations exists.
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Off-shore
foreign investors may provide the securities they hold as the underlying shares of depositary receipts and act as selling stockholders in depositary receipts offerings.
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Off-shore
foreign institutional investors are required to appoint their agent or nominee to attend the stockholders meeting of the invested company.
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Currently, subject to the specific restriction imposed by relevant regulations, the
off-shore
foreign
institutional investors may invest in the Taiwan securities market without any amount restriction. However, a ceiling will be separately determined by the Securities and Futures Bureau after consultation with the Central Bank of the ROC (Taiwan) for
investment by offshore oversea Chinese and foreign individual investors.
Foreign Investment Approval
Other than:
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foreign institutional investors;
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foreign individual investors; and
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investors in overseas convertible bonds and depositary receipts,
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foreign investors who wish to make direct
investments in the shares of Taiwan companies may submit a foreign investment approval application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other government authority to qualify for benefits granted
under the Statute for Investment by Foreign Nationals. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other
governmental agencies. Any
non-Taiwan
person possessing a foreign investment approval may remit capital for the approved investment and repatriate annual net profits and interests and cash dividends
attributable to an approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.
In addition to the general restrictions against direct investment by
non-Taiwan
persons in Taiwan
companies,
non-Taiwan
persons are currently prohibited from investing in prohibited industries in Taiwan under the Negative List promulgated by the Executive Yuan from time to time. The prohibition on direct
foreign investment in the prohibited industries in the Negative List is absolute with the consequence of certain specific exemption from the application of the Negative List. Under the Negative List, some other industries are restricted so that
non-Taiwan
persons may directly invest only up to a specified level and with the specific approval of the relevant authority which is responsible for enforcing the legislation which the negative list is intended to
implement. The telecommunication industry is a restricted industry under the Negative List.
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Depositary Receipts
In April 1992, the Securities and Futures Bureau began allowing Taiwan companies listed on the TWSE, with the prior approval of the Securities
and Futures Bureau, to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the ROC Ministry of Finance began allowing companies whose shares are traded on the Taipei Exchange (formerly known as Gre
Tai Securities Market) also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of its capital stock. Approvals for these issuances are still required.
After the issuance of a depositary share, a holder of the depositary receipt evidencing the depositary shares may request the depositary
issuing the depositary share to cause the underlying shares to be sold in Taiwan and to distribute the proceeds of the sale to or to withdraw the shares and deliver the shares to the depositary receipt holder. A citizen of the PRC is not permitted
to withdraw and hold our shares.
If you are an offshore foreign institutional investor holding the depositary receipts, you must register
with the TWSE as a foreign investor before you will be permitted to withdraw the shares represented by the depositary receipts. In addition to obtaining registration with the TWSE, you must also (i) appoint a qualified local agent 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, (ii) appoint a custodian
bank to hold the securities and cash proceeds, confirm transactions, settle trades and report and declare other relevant information and; (iii) appoint a tax guarantor as guarantor for the full compliance of the withdrawing depositary receipt
holders tax filing and payment obligations in the ROC. A depositary receipt holder not registered as a foreign investor with the TWSE, or not has made the necessary appointments as outlined above, will be unable to hold or subsequently
transfer the shares withdrawn from the depositary receipt facility.
No deposits of shares may be made in a depositary receipt facility
and no depositary shares may be issued against deposits without specific Securities and Futures Bureau approval, unless they are:
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(ii)
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free distributions of shares;
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(iii)
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due to the exercise by the depositary receipt holder preemptive rights in the event of capital increases for cash; or
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(iv)
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if permitted under the deposit agreement and custody agreement and within the amount of depositary receipts which have been withdrawn, due to the direct purchase by investors or purchase through the depositary on the
TWSE or the Taipei Exchange (formerly known as Gre Tai Securities Market) or delivery by investors of the shares for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance
cannot exceed the number of issued depositary receipts previously approved by the Securities and Futures Bureau of the FSC in connection with the offering plus any ADSs issued pursuant to the events described in (i), (ii) and (iii) above.
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An ADS holder or the depositary, without obtaining further approvals from the Central Bank of the ROC (Taiwan) or any other
governmental authority or agency of the ROC, may convert NT dollars into other currencies, including U.S. dollars, in respect of:
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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
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any cash dividends or distributions received from the common shares.
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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
payment for rights offerings. The depositary may be required to obtain foreign exchange payment approval from the Central Bank of the ROC (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 ROC (Taiwan) will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.
Exchange Controls
Taiwans Foreign
Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the FSC and by the Central Bank of the ROC (Taiwan). Current regulations favor
trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services
may be purchased freely from the designated foreign exchange banks.
Aside from trade-related foreign exchange transactions, Taiwan
companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million (or its equivalent) and US$5 million, (or its equivalent), respectively, in each calendar year. These limits apply to remittances involving a
conversion between New Taiwan dollars and U.S. dollars or other foreign currencies. A requirement is also imposed on all private enterprises to register all medium and long-term foreign debt with the Central Bank of the ROC (Taiwan).
In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies
of up to US$100,000 per remittance if required documentation is provided to Taiwan authorities. This limit applies only to remittances involving a conversion between New Taiwan dollars and U.S. dollars or other foreign currencies.
E. Taxation
ROC Taxation
The discussion below describes the principal ROC tax consequences of the ownership and disposition of ADSs representing common shares and of
common shares. It applies to you only if you are:
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an individual who is not a citizen of the ROC, who owns ADSs or common shares and who is not physically present in Taiwan for 183 days or more during any calendar year; or
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a corporation or a
non-corporate
body that is organized under the laws of a jurisdiction other than the ROC for profit-making purposes and has no fixed place of business or other
permanent establishment in Taiwan.
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You should also consult your tax advisors concerning the tax consequences of owning ADSs
and common shares in the ROC and any other relevant taxing jurisdiction to which they are subject.
Dividends
Dividends declared by us out of our retained earnings and distributed to you are subject to ROC withholding tax, currently at the rate of 20%,
on the amount of the distribution in the case of cash dividends or on the par value of the common shares in the case of stock dividends. However, a 10% ROC unappropriated earnings tax paid by us on our undistributed
after-tax
earnings, if any, may provide a credit of up to 10% of the gross amount of any dividends declared out of such earnings that would reduce the 20% ROC withholding tax imposed on these distributions.
Starting from 2015, the allowed tax credit is adjusted to 50% of the unappropriated earnings tax paid by us.
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Share or cash dividends paid by us out of our capital surplus which are derived from the issuance
of shares at a premium are not subject to ROC withholding tax. According to the rulings of Ref.
Tai-Tsai-Hsuei-Tzi-09504509440
issued by the Ministry of Finance of the ROC, if a company reduces its share capital and redeems for cash its outstanding common shares issued to the companys stockholders by capitalization of capital surplus, those premiums under the
capitalized capital surplus derived from
re-evaluation
of assets, sale of lands and/or merger with other enterprise shall be deemed as the gain in the stockholders capital investment, and shall be deemed
as stockholders dividend income (or investment revenue) and be subject to ROC income tax.
As the legal reserve is
set-aside
from companys profit earnings (after tax) in accordance with Article 237 of ROC Company Act, receipt of distribution of legal reserve shall be deemed as stockholders dividend income (or
investment revenue) and be subject to ROC income tax collected by way of withholding at the time of distribution, currently at the rate of 20%, unless a lower withholding rate is provided under a tax treaty between the ROC and the jurisdiction where
the
Non-ROC
Stockholder is a resident.
Capital Gains
Gains from the sale of property in the ROC are generally subject to ROC income tax. Effective January 1, 2016, capital gains on the sale
of common shares, including common shares withdrawn from the ADS facility, received by a
Non-Resident
Individual or
Non-Resident
Entity is no longer subject to the
capital gain tax and is further exempted from Alternative Minimum Tax, or the AMT.
Sales of ADSs by you are regarded as transactions
relating to property located outside the ROC and thus any gains derived therefrom are currently not subject to ROC income tax.
Preemptive Rights
Distributions of statutory preemptive rights for common shares in compliance with ROC law are not subject to any ROC tax. Proceeds
derived from sales of statutory preemptive rights evidenced by securities are subject to securities transaction tax at the rate of 0.3% of the gross amount received. Proceeds derived from sales of statutory preemptive rights which are not evidenced
by securities are subject to capital gains tax at the rate of 20% of the gains realized if the seller is a
non-ROC
resident regardless of whether the
non-ROC
resident is
an individual or entity.
Subject to compliance with ROC law, we, at our sole discretion, can determine whether statutory preemptive
rights shall be evidenced by issuance of securities.
Securities Transaction Tax
A securities transaction tax, at the rate of 0.3% of the gross amount received, payable by the seller will be withheld upon a sale of common
shares in Taiwan. Transfers of ADSs are not subject to ROC securities transaction tax. According to a letter issued by the Ministry of Finance of the ROC in 1996, withdrawal of common shares from the deposit facility will not be subject to ROC
securities transaction tax.
Estate Taxation and Gift Tax
ROC estate tax is payable on any property within Taiwan of a deceased person who is a
non-resident
individual, and ROC gift tax is payable on any property within Taiwan donated by any such person. Under ROC estate and gift tax laws, common shares issued by Taiwan companies are deemed located in Taiwan regardless of the location of the owner. It
is not clear whether the ADSs will be regarded as property located in Taiwan under ROC estate and gift tax laws. Starting from January 21, 2009, the estate tax and gift tax rates were reduced to 10%.
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Tax Treaty
The ROC does not have an income tax treaty with the United States. On the other hand, the ROC has income tax treaties with Indonesia, Israel,
Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, the Netherlands, United Kingdom, Gambia, Senegal, Sweden, Belgium, Denmark, Paraguay, Hungary, France, India, Slovakia, Germany, Thailand, Switzerland,
Luxembourg, Kiribati, Austria, Italy, Japan, Canada and Poland, which may limit the rate of ROC withholding tax on dividends paid with respect to common shares in Taiwan companies. It is unclear whether if you hold ADSs, you will be considered to
hold common shares for the purposes of these treaties. Accordingly, if you may otherwise be entitled to the benefits of the relevant income tax treaty, you should consult your tax advisors concerning your eligibility for the benefits with respect to
the ADSs.
Unappropriated Earnings Tax
Under the ROC Income Tax Act, a 10% unappropriated earnings tax will be imposed on a company for its
after-tax
earnings generated after January 1, 1998 which are not distributed in the following year. The unappropriated earnings tax so paid will further reduce the retained earnings available for future
distribution. When the company declares dividends out of those retained earnings, up to a maximum amount of 10% of the declared dividends may be credited against the 20% withholding tax imposed on the
non-resident
holders of its shares.
U.S. Federal Income Tax Considerations for U.S. Holders
The following is a summary of certain U.S. federal income tax consequences of the ownership and disposition of our shares and ADSs as of the
date hereof. The discussion set forth below is applicable to beneficial owners of our shares or ADSs that hold the shares or ADSs as capital assets and that are U.S. holders (defined below) and
non-residents
of the ROC. You are a U.S. holder if you are:
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an individual who is a citizen or resident of the United States;
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a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate the income of which is subject to U.S. federal income taxation regardless of its source;
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a trust that is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust; or
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a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the Code), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. It is for general purposes only and you
should not consider it to be tax advice. In addition, it is also based in part on representations made by the depositary and assumes that the deposit agreement and any related agreement will be performed in accordance with their terms. This summary
does not represent a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or
non-U.S.
tax
laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences or the Medicare tax on net investment income). In addition, it does not represent a detailed description of the U.S. federal income tax consequences
applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
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a dealer in securities or currencies;
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a trader in securities if you elect to use a
mark-to-market
method of accounting for your securities holdings;
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a financial institution or an insurance company;
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a regulated investment company;
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a real estate investment trust;
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a
tax-exempt
organization;
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a person liable for alternative minimum tax;
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a person holding shares or ADSs as part of a hedging, integrated or conversion transaction, constructive sale or straddle;
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a person owning, actually or constructively, 10% or more of our voting stock;
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a partnership or other pass-through entity for U.S. federal income tax purposes; or
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a person whose functional currency is not the U.S. dollar.
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We cannot assure you
that a later change in law will not alter significantly the tax considerations that we describe in this summary.
If a partnership (or
other entity treated as a partnership for United States federal income tax purposes) holds our shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a
partner of a partnership holding our shares or ADSs, you should consult your tax advisor.
You should consult your own tax advisor
concerning the particular U.S. federal income tax consequences to you of the ownership and disposition of the shares or ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
In general, for U.S. federal income tax purposes, a U.S. holder who is the beneficial owner of an ADS will be treated as the owner of the
shares underlying such ADS. Deposits or withdrawals of shares, actually or constructively, by U.S. holders for ADSs will not be subject to U.S. federal income tax.
Taxation of Dividends
The gross
amount of distributions (other than certain pro rata distributions of shares to all stockholders) you receive on your shares or ADSs, including net amounts withheld in respect of ROC withholding taxes, will generally be treated as dividend income to
you to the extent the distributions are made from our current and accumulated earnings and profits as calculated according to U.S. federal income tax principles. These amounts (including withheld taxes) will be includible in your gross income as
ordinary income on the day you actually or constructively receive the distributions, which in the case of an ADS will be the date actually or constructively received by the depositary. You will not be entitled to claim a dividends-received deduction
allowed to corporations under the Code with respect to distributions you receive from us.
With respect to
non-corporate
U.S. holders, certain dividends received from a qualified foreign corporation, on shares, or ADSs backed by such shares, that are readily tradable on an established securities market in the
United States may be subject to reduced rates of taxation, provided further that the foreign corporation was not, in the year prior to the year in which the dividends are paid, and is not, in the year in which the dividends are paid, a passive
foreign investment company (see Passive Foreign Investment Company below). A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or ADSs backed by such shares)
that are readily tradable on an established securities market in the United States. Under current U.S. Treasury Department guidance, our ADSs, which are listed on the NYSE, but not our shares, are treated as readily tradable on an established
securities market in the United States. Thus, we do not believe that dividends that we pay on our shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs
will continue to be readily tradable on an established securities market in later years, or that our shares will be readily tradable on an established securities market in any given year.
Non-corporate
U.S.
holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss, or that elect to treat the dividend income as investment income pursuant to Section 163(d)(4) of the Code, will not
be eligible for the reduced rates of taxation regardless of the trading status of our shares or ADSs. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to
positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisor regarding the application of these rules given your particular circumstances.
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The amount of any dividend paid in NT dollars will equal the U.S. dollar value of the NT dollars
you receive, calculated by reference to the exchange rate in effect on the date you actually or constructively receive the dividend, which in the case of an ADS will be the date actually or constructively received by the depositary, regardless of
whether the NT dollars are actually converted into U.S. dollars. If the NT dollars received as a dividend are converted into U.S. dollars on the date they are actually or constructively received, you generally will not be required to recognize
foreign currency gain or loss in respect of the dividend income. If the NT dollars received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the NT dollars equal to their U.S. dollar value on the
date of receipt. Any gain or loss you realize if you subsequently sell or otherwise dispose of the NT dollars will be treated as ordinary income or loss from sources within the United States for foreign tax credit limitation purposes.
Subject to certain conditions and limitations under the Code, you may be entitled to a credit or deduction against your U.S. federal income
taxes for the net amount of any ROC taxes that are withheld from dividend distributions made to you. In determining the amounts withheld in respect of ROC taxes, any reduction of the amount withheld on account of a ROC credit in respect of the 10%
unappropriated earnings tax imposed on us is not considered a withholding tax and will not be treated as distributed to you or creditable by you against your U.S. federal income tax. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For purposes of calculating the foreign tax credit, dividends we pay with respect to shares or ADSs will generally be considered passive category income from sources outside the United States.
Further, a U.S. holder that:
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has held shares or ADSs for less than a specified minimum period during which it is not protected from risk of loss, or
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is obligated to make payments related to the dividends,
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may not be allowed a foreign tax credit for foreign
taxes imposed on dividends paid on shares or ADSs. The rules governing the foreign tax credit are complex. We therefore urge you to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution you receive exceeds our current and accumulated earnings and profits for a taxable
year, as determined under U.S. federal income tax principles, the distribution will first be treated as a
tax-free
return of capital, causing a reduction in your adjusted basis in the shares or ADSs and
thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent disposition of the shares or ADSs. The balance in excess of adjusted basis, if any, will be taxable to you as capital gain recognized on a
sale or exchange. However, we do not expect to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend.
It is possible that pro rata distributions of shares or ADSs to all stockholders may be made in a manner that is not subject to U.S. federal
income tax. The basis of any new shares or ADSs so received will generally be determined by allocating your basis in the old shares or ADSs between the old shares or ADSs and the new shares or ADSs, based on their relative fair market values on the
date of distribution.
For U.S. tax purposes, any such
tax-free
share distribution would not
result in foreign source income to you. Consequently, you may not be able to use the foreign tax credit associated with any ROC withholding tax imposed on such distributions unless you can use the credit (subject to applicable limitations) against
U.S. federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes.
111
Taxation of Capital Gains
When you sell or otherwise dispose of your shares or ADSs, you will generally recognize capital gain or loss in an amount equal to the
difference between the U.S. dollar value of the amount realized for the shares or ADSs and your basis in the shares or ADSs, determined in U.S. dollars. Such gain or loss will generally be long-term capital gain or loss if you have held the shares
or ADSs for more than one year. If you are an individual or other
non-corporate
holder, long-term capital gains will be eligible for reduced rates of taxation. Your ability to deduct capital losses is subject
to limitations. For foreign tax credit limitation purposes, such gain or loss will generally be treated as U.S. source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any ROC tax imposed on the disposition
of shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources.
Any ROC securities transaction taxes that you pay generally will not be creditable foreign taxes for U.S. federal income tax purposes, but you
may be able to deduct such taxes, subject to certain limitations under the Code. You are urged to consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.
Passive Foreign Investment Company
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable
year ending on December 31, 2016, and we do not expect to become a PFIC for our current taxable year or in the future, although there can be no assurance in this regard. If we were treated as a PFIC for any taxable year during which you held
our shares or ADSs, you could be subject to additional U.S. federal income taxes on gain recognized with respect to the shares or ADSs and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the
PFIC rules.
Non-corporate
U.S. holders will not be eligible for reduced rates of taxation on any
dividends received from us, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
Information
Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our shares or ADSs and
the proceeds from the sale, exchange or other disposition of our shares or ADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient such as a corporation. A backup
withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a
credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
F.
Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have
filed this annual report on Form
20-F,
including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we have already filed with the
SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
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You may read and copy this annual report, including the exhibits incorporated by reference in
this annual report, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SECs regional offices in New York, New York and Chicago, Illinois. You also can obtain copies of this annual report, including
the exhibits incorporated by reference in this annual report, from the SECs Public Reference Room and regional offices upon payment of a duplicating fee.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file
electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this web site.
I.
Subsidiary Information
Not applicable.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Market risk is the risk of
loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. In the normal course of business, we are routinely subject to a variety of risks, including market risk associated with
interest rate movements, currency rate movements on
non-NT
dollar denominated assets and liabilities and equity price movements on our portfolio of equity securities.
We regularly assess these financial instruments and their ability to address market risk and have established policies and business practices
to protect against the adverse effects of these and other potential exposures.
Interest Rate Risk
We do not expect interest rate risk to have a material impact on our financial condition and results of operations. Please refer to Item
5. Operating and Financial Review and ProspectsB. Liquidity and Capital Resources for a discussion of our loans.
For our
non-fixed
interest rate loans, the interest rates will change in accordance with the fixed rates of the banks we borrowed from. For the financial assets, the risk associated with fluctuating interest rates is
principally confined to our cash deposits in banks, which is one of the many ways we manage our capital. Assuming an increase or decrease of 0.25% in the interest rates of our
non-fixed
interest rate financial
assets and loans, our profit before tax for the year ended December 31, 2016 would have increased or decreased by NT$12.1 million (US$0.4 million). We have not used any derivative financial instruments to hedge interest rate risk. We have
not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. As of December 31, 2016, our cash and cash equivalents amounted to NT$31.1 billion (US$1.0 billion). Interest income from our cash
deposits in banks accounts for only a very small percentage of our total revenue. Therefore, we believe our exposure to interest rate risk is immaterial.
Foreign Currency Risk
We are exposed to
foreign currency risk as a result of (i) our foreign currency and derivative trading activities; (ii) our telecommunications equipment being sourced from overseas suppliers; (iii) our international settlement payments associated with
our services for international calls and roaming traffic; and (iv) securities denominated in foreign currencies.
We entered into
forward exchange contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates. Outstanding forward exchange contracts on December 31, 2016 were as follows:
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FX Instrument
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Currencies
Involved
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Maturity Period
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Contract Amount
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Forward exchange
contracts-Buy
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EUR$/NT$
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2017.03
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EUR$5 million/NT$167 million
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Forward exchange
contracts-Buy
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US$/NT$
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2017.01
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US$2 million/NT$55 million
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Forward exchange
contracts-Buy
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EUR$/NT$
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2017.03
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EUR$3 million/NT$102 million
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Note 38 to our consolidated financial statements included elsewhere in this annual report provides a
sensitivity analysis for foreign currency risk.
Equity Price Risk
We are exposed to equity price risk as a result of our
available-for-sale
equity securities, including publicly-traded equities, and we manage our equity investment portfolio in accordance with our internal policies and
procedures.
The table below presents the carrying amount and unrealized gain or loss for our
available-for-sale
equity securities traded in an active market and with quoted market price as of December 31, 2016.
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Carrying
Amount
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Unrealized
Gain
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Unrealized
Loss
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NT$
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NT$
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NT$
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(in millions)
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Available-for-sale
equity securities
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Domestic listed stocks
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2,521
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144
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The total value of our listed
available-for-sale
equity portfolio amounted to NT$2.5 billion (US$77.8 million) as of December 31, 2016, which decreased approximately 22.3% compared with the
total value of our listed equity portfolio as of December 31, 2015. This decrease was mainly due to the decreasing price of the equity securities held by us. For the year ended December 31, 2016, we recognized other-than-temporary
impairment losses for listed stocks of NT$577.3 million (US$17.8 million).
The value of our equity holdings fluctuates depending on
the market conditions. Assuming an increase or decrease of 5% in the equity prices, our comprehensive income for the year ended December 31, 2016 would have increased or decreased by NT$126.1 million (US$3.9 million). However, we do not
expect the gains and losses in the values of the equities that we hold to have a material impact on our financial condition and results of operations.
Other Market Risk
We have made
investments in corporate bonds and bank debentures issued by domestic public companies with strong industry leadership and solid profits. Industries in which we have invested include financials, utilities, technology, and so on. As of
December 31, 2016, the fair value of our investments in corporate bonds and bank debentures amounted to NT$2.1 billion (US$66.2 million), all of which were classified as
held-to-maturity
financial assets. The fair value of these corporate bonds and bank debentures is valued using market-based observable inputs including duration, yield
rate and credit rating, which are subject to fluctuation based on many factors such as prevailing market conditions. However, we do not expect the gains and losses in the values of these investments to have a material impact on our financial
condition and results of operations.
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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A. Debt Securities
Not applicable
B. Warrants and Rights
Not applicable
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C. Other Securities
Not applicable
D. American Depositary Shares
Depositary Fees
Under the terms
of the deposit agreement for our ADSs, an ADS holder may have to pay the following service fees to the depositary:
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Service
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Fees
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Issuance of ADSs
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Up to US$5.00 per 100 ADS issued
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Cancellation of ADSs
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Up to US$5.00 per 100 ADS cancelled
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Distribution of cash dividends or other cash distributions
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Up to US$2.00 per 100 ADS held
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Distribution of ADSs pursuant to stock dividends, free stock distributions or exercises of
rights
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Up to US$5.00 per 100 ADS held
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Distribution of securities other than ADSs or rights to purchase additional ADSs
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Up to US$5.00 per 100 ADS held
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Depositary Charges
In addition, an ADS holder shall be responsible for the following charges:
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taxes (including applicable interest and penalties) and other governmental charges;
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such registration fees as may from time to time be in effect for the registration of common shares or other deposited securities on the share register and applicable to transfers of common shares or other deposited
securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;
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such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of ADS holders and beneficial owners of ADSs;
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the expenses and charges incurred by the depositary in the conversion of foreign currency; and
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the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities.
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Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their
clients) receiving the newly-issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The brokers in turn charge these transaction fees to their clients.
Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by
the depositary to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e.,
stock dividends, rights offerings), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or
un-certificated
in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and settlement
system, The Depository Trust Company, or DTC, the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC
accounts. The brokers and custodians who hold their clients ADSs in DTC accounts in turn charge their clients accounts the amount of the fees paid to the depositary.
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In the event of refusal to pay the depositary fees and charges, the depositary may, under the
terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The fees and charges ADS holders may be required to pay may vary over time and may be changed by us and by the depositary. ADS holders will
receive prior notice of such changes.
Payments by Depositary
In 2016, we received US$1.1 million net payments (after deducting the 30% U.S. withholding tax) from JPMorgan Chase Bank, N.A., the
Depositary Bank for our ADR program. The payments were intended to cover certain of our expenses incurred in relation to the ADR program for the year, including:
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investor relations efforts;
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legal fees, NYSE listing fees, proxy process expenses, and SEC filing fees;
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Sarbanes-Oxley and accounting related expenses in connection with ongoing SEC compliance and listing requirements; and
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other ADR program-related expenses.
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The accompanying notes are an integral part of the consolidated financial statements.
The following diagram presents information regarding the relationship and ownership percentages between Chunghwa and its subsidiaries as of
December 31, 2016:
Acquisitions of businesses are accounted for using the acquisition method. Acquisition-related costs are recognized in profit or loss as
incurred.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any noncontrolling interests in
the acquiree, and the fair value of the acquirers previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Noncontrolling interests that are present ownership interests and entitle their holders to a proportionate share of the entitys net
assets in the event of liquidation may be initially measured either at fair value or at the present ownership instruments proportionate share in the recognized amounts of the acquirees identifiable net assets. The choice of measurement
basis is made on a transaction-by-transaction basis. Other types of noncontrolling interests are measured at fair value.
If the initial
accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports its financial statements provisional amounts for the items for which the accounting is incomplete. During the
measurement period, the Company retrospectively adjusts the provisional amounts recognized at the acquisition date or recognizes additional assets or liabilities to reflect new information obtained about facts and circumstances that existed as of
the acquisition date and if known, would have affected the measurement of the amounts recognized as of that date.
In preparing the financial statements of each individual entity, transactions in currencies other than the entitys functional
currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions.
At the end of each
reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation denominated in foreign currencies are recognized
in profit or loss in the period in which they arise.
Non-monetary items carried at fair value that are denominated in foreign currencies
are retranslated at the rates prevailing at the date when the fair value was determined and related exchange differences are recognized in profit or loss. Conversely, when the fair value changes were recognized in other comprehensive income, related
exchange difference shall be recognized in other comprehensive income.
Non-monetary items that are measured at historical cost in a
foreign currency are not retranslated.
Chunghwa use New Taiwan dollars (NT$) as the functional currency. For the purposes of presenting
consolidated financial statements, the assets and liabilities of the Companys foreign operations (including of the subsidiaries and associates in other countries or currencies used different with Chunghwa) are translated into New Taiwan
dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and
attributed to stockholders of the parent and noncontrolling interests as appropriate.
Cash equivalents include commercial paper, time deposits and negotiable certificate of deposit with original maturities within three months
from the date of acquisition, highly liquid, readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.
Inventories are stated at the lower of cost or net realizable value item by item, except for those that may be appropriate to group items of
similar or related inventories. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. The calculation of the cost of inventory is derived using the
weighted-average method.
Inventories of LED are stated at the lower of cost or net realizable value item by item, except for those that may be appropriate to group as
similar items or related inventories. Land acquired before construction is classified as land held for development, and then reclassified as land held under development after LED begins its construction project.
When using the completed-contract method for its construction projects, LED recognizes the proceeds from customers as advances from customers
for land and building before the construction project is completed. After completion of the construction project and ownership is transferred to the customers, LED recognizes the relevant revenues.
An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture.
A joint venture is a joint arrangement whereby the Company and other parties that have joint control of the arrangement have rights to the net assets of the arrangement.
Investments accounted for using the equity method include investments in associates and interests in joint ventures. Under the equity method,
an investment in an associate or a joint venture is initially recognized at cost and adjusted thereafter to recognize the Companys share of profit or loss and other comprehensive income of the associate and joint venture as well as the
distribution received.
When the Company reduces its ownership interest in an associate or a joint venture but the Company continues to
use the equity method, the Company reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be
reclassified to profit or loss on the disposal of the related assets or liabilities.
Any excess of the cost of acquisition over the
Companys share of the fair value of the identifiable net assets and liabilities of an associate or a joint venture at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment and shall
not be amortized. Any excess of the Companys share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognized immediately in profit or loss.
When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its
recoverable amount with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment
subsequently increases.
When the Company transacts with its associate and joint venture, profits and losses resulting from the
transactions with the associate and joint venture are recognized in the Companys consolidated financial statements only to the extent of interests in the associate and joint venture that are not related to the Company.
Property, plant and equipment are initially measured at cost and subsequently measured at cost less accumulated depreciation and accumulated
impairment loss.
Depreciation on property, plant and equipment is recognized using the straight-line method. Each significant part is
depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed at the end of each year, with the effect of any changes in estimate accounted for on a prospective basis.
On derecognition of an item of property, plant and equipment, the difference between the net disposal proceeds and the carrying amount of the
asset is recognized in profit or loss in the period in which the property is derecognized.
Investment properties are properties held to earn rentals and/or for capital appreciation. Investment properties also include land held for a
currently undetermined future use.
Investment properties are measured initially at cost, including transaction costs. Subsequent to
initial recognition, investment properties are measured at cost less accumulated depreciation and accumulated impairment loss. Depreciation is recognized using the straight-line method.
On derecognition of the investment properties, the difference between the net disposal proceeds and the carrying amount of the asset is
recognized in profit or loss in the period in which the property is derecognized.
Goodwill arising from the acquisition of a business is carried at cost as established at the date of acquisition of the business less
accumulated impairment loss.
For the purpose of impairment testing, goodwill is allocated to each of the Companys cash-generating
units or groups of cash-generating units (referred to as cash-generating unit) that are expected to benefit from the synergies of the business combination.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication
that the unit may be impaired, by comparing its carrying amount, including the attributable goodwill, with its recoverable amount. However, if the goodwill allocated to a cash-generating unit was acquired in a business combination during the current
annual period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the
carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss is recognized directly in profit or loss. An impairment loss
recognized for goodwill is not reversed in subsequent periods.
Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less
accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value and amortization method are reviewed at the end of each reporting period, with the effect of any
changes in estimate being accounted for on a prospective basis. The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless the Company expects to dispose of the intangible asset before the end of its
economic life. Intangible assets with indefinite useful lives that are acquired separately are measured at cost less accumulated impairment loss.
Intangible assets acquired in a business combination and recognized separately from goodwill are
initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, they are measured on the same basis as intangible assets that are acquired separately.
Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the
carrying amount of the asset, are recognized in profit or loss in the period in which the asset is derecognized.
At the end of each reporting period, the Company reviews the carrying amounts of
its tangible and intangible assets, excluding goodwill, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually,
and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and
value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount, with the resulting
impairment loss recognized in profit or loss.
When an impairment loss is subsequently reversed, the carrying amount of the asset or
cash-generating unit is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior
years. A reversal of an impairment loss is recognized in profit or loss.
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instruments.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial
liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
All regular way purchases or sales of financial assets are recognized and
derecognized on a trade date basis. The regular way of transaction means the purchase or sale of financial assets delivered within the time frame established by regulation or convention in the marketplace.
Financial assets are
classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on
remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss does not incorporate any dividend or interest earned on the financial asset.
Held-to-maturity financial assets are non-derivative
financial assets with fixed or determinable payments and fixed maturity date that the Company has positive intention and ability to hold to maturity other than those that are designated as at fair value through profit or loss or as
available-for-sale and those that meet the definition of loans and receivables on initial recognition.
The Company invests in bank
debentures and corporate bonds with specific credit ratings and the Company has positive intent and ability to hold to maturity, are classified as held-to-maturity investments.
Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less
any impairment loss.
AFS financial assets are
non-derivatives that are either designated as AFS or are not classified as loans and receivables, held-to-maturity financial assets or financial assets at fair value through profit or loss.
The Company invests in listed stocks, emerging market stocks, and unlisted stocks. Among these investments, those that have a quoted market
price in an active market are classified as AFS and measured at fair value at the end of each reporting period; the others that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at
cost less any identified impairment losses at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between
the carrying amount and the fair value is recognized in other comprehensive income. Any impairment losses are recognized in profit or loss.
Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates, interest income
calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS financial assets are recognized in other comprehensive income and will be
reclassified to profit or loss when the investment is disposed of or is determined to be impaired.
Dividends on AFS equity instruments
are recognized in profit or loss when the Companys right to receive the dividends is established.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Loans and receivables (including cash and cash equivalents, trade notes and accounts receivable, receivables from related parties, other financial assets and refundable deposits) are
measured at amortized cost using the effective interest method, less any impairment loss, except for short-term receivables as the effect of discounting is immaterial.
Financial assets, other than those at FVTPL, are assessed to
determine whether there is objective evidence that an impairment loss has occurred at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that
occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
For
financial assets carried at amortized cost, such as held-to-maturity financial assets, assets that are individually assessed and not impaired are, in addition, assessed for impairment on a collective basis.
For financial assets carried at amortized cost, the amount of the impairment loss recognized is mainly based on the difference between the
assets carrying amount and the present value of estimated future cash flows, discounted at the financial assets original effective interest rate. However, since the discounted effect of short-term receivables is immaterial, the
impairment loss is recognized on the difference between carrying amount and estimated future cash flow.
For financial assets measured at
amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed
through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
For AFS equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective
evidence of impairment.
When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in
other comprehensive income are reclassified to profit or loss in the period.
In respect of AFS equity securities, impairment losses
previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income.
For financial assets that are carried at cost, the amount of the impairment loss is mainly measured as the difference between the
assets carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversed in subsequent periods.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade
notes and accounts receivable and other receivables, where the carrying amount is reduced through the use of an allowance account. When a trade note and accounts receivable and other receivables are considered uncollectible, it is written off
against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss except for uncollectible
trade notes and accounts receivable and other receivables that are written off against the allowance account.
The Company derecognizes a financial asset only when the
contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.
On derecognition of a financial asset in its entirety, the difference between the assets
carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss.
Except for financial liabilities at FVTPL, all the financial
liabilities are subsequently measured at amortized cost using the effective interest method.
The Company derecognizes financial liabilities when,
and only when, the Companys obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets
transferred or liabilities assumed, is recognized in profit or loss.
The Company enters into a variety of derivative financial
instruments to manage its exposure to foreign exchange rate risks, including forward exchange contracts.
Derivatives are initially
measured at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the
derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. When the fair value of derivative financial instruments is positive, the
derivative is recognized as a financial asset; when the fair value of derivative financial instruments is negative, the derivative is recognized as a financial liability.
The
Company designates some derivatives instruments as cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other
comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.
The associated
gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the line item relating to the hedged item in the same period when the hedged item affects profit or
loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and
are included in the initial cost of the non-financial asset or non-financial liability.
Hedge accounting is discontinued prospectively
when the Company revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer meets the criteria for hedge accounting. The cumulative gain or loss on the hedging
instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur,
the gain or loss accumulated in equity is recognized immediately in profit or loss.
Provisions are measured at the best estimate of the expenditure required to settle the Companys obligation at the end of the reporting
period, taking into account the risks and uncertainties surrounding the obligation. The provisions for warranties claims and trade-in right are made by management according to the sales agreements which represent the managements best estimate
of the future outflow of economic benefits. The provisions of warranties claims and trade-in right are recognized as operating cost and the reduction of revenue, respectively, in the period in which the goods are sold.
Revenue from the sale of goods is recognized when all the following conditions are satisfied:
Revenue is measured at the fair value of the consideration received or receivable and represents amounts for goods sold in the normal course
of business, net of sales discounts and volume rebates. For trade notes and accounts receivable due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions
are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.
Usage revenues from fixed-line services (including local, domestic long distance and international long distance telephone services), cellular
services, Internet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon seconds or minutes of traffic processed when the services are
provided in accordance with contract terms.
Other revenues are recognized as follows: (a) one-time subscriber connection fees (on
fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services, mobile, Internet and data services) are accrued every month, and (c) prepaid services
(fixed-line, mobile, Internet and data services) are recognized as income based upon actual usage by customers.
Where the Company enters
into transactions which involve both the provision of telecommunications service bundled with products such as handsets, total consideration received from products and telecommunications service in these arrangements are allocated and measured using
units of accounting within the arrangement based on their relative fair values limited to the amount that is not contingent upon the delivery of products.
Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract.
Dividend income from investments is recognized when the stockholders right to receive payment has been established under the premises
when it is probable that the economic benefit related to the transactions will flow to the Company and that the revenue can be reasonably measured.
Interest income from a financial asset is recognized when it is probable that the economic
benefits related to the transactions will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.
When another party is involved in providing goods or services to a customer, the Company is acting as a principal when it has exposure to
the significant risks and rewards associated with the sale of goods or the rendering of services; otherwise, the Company is acting as an agent. When the Company is acting as a principal, gross inflows of economic benefits arising from transactions
is recognized as revenue. When the Company is acting as an agent, revenue is recognized in the amount of commission.
Rental income from operating leases is recognized on a straight-line
basis over the term of the relevant lease.
Operating lease payments are recognized as an expense on a
straight-line basis over the lease term.
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, are added to the cost of those
assets, until such time as the assets are substantially ready for their intended use or sale.
Other than stated above, all other borrowing
costs are recognized in profit or loss in the period in which they are incurred.
Liabilities recognized in respect of short-term employee
benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.
Payments to defined contribution retirement benefit plans are recognized
as an expense when employees have rendered service entitling them to the contributions.
Defined benefit costs (including service cost,
net interest and remeasurement) under the defined benefit retirement benefit plans are determined using the projected unit credit method. Service cost (including current service cost and gains or losses on settlements) and net interest on the net
defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising (a) actuarial gains and losses; and (b) the return on plan assets, excluding amounts included in net interest
on the net defined benefit liability (asset), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be
reclassified to profit or loss.
Net defined benefit liability (asset) represents the actual deficit (surplus) in the Companys
defined benefit plan. Any surplus resulting from this calculation is limited to the present value of any refunds from the plans or reductions in future contributions to the plans.
Other long-term employee benefits are accounted for in the
same way as the accounting required for defined benefit plan except that remeasurement is recognized in profit or loss.
The fair value determined at the grant date of the employee share options is expensed
on a straight-line basis over the vesting period, based on the Companys estimate of employee share options that are expected to ultimately vest, with a corresponding increase in additional paid-in capitalemployee stock options. If the
equity instruments granted vest immediately at the grant date, expenses are recognized in full in profit or loss.
At the end of each
reporting period, the Company revises its estimate of the number of employee share options expected to vest. The impact of the revision of the original estimates is recognized in profit or loss such that the cumulative expense reflects the revised
estimate, with a corresponding adjustment to additional paid-in capitalemployee stock options.
Income tax expense represents the sum of the tax currently payable and deferred tax.
The current tax is based on taxable profit for the year. Taxable profit differs
from profit as reported in the consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Companys liability for
current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Income tax
(10%) on undistributed earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year.
Adjustments of prior years tax liabilities are added to or deducted from the current years tax provision.
Deferred tax is recognized on temporary differences between the carrying amounts
of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. If the temporary difference arises from the initial recognition (other than in a business combination) of
assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax liability is not recognized on taxable temporary
difference arising from initial recognition of goodwill.
Deferred tax liabilities are generally recognized for all taxable temporary
differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits from purchases of machinery, equipment and technology, and research and development expenditures to
the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.
Deferred tax liabilities are recognized for taxable temporary differences associated with
investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the
benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax
assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred
tax asset is also reviewed at the end of each reporting period and recognized to the to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled
or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from
the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Current and deferred tax are recognized in profit or
loss, except when they relate to items that are recognized in other comprehensive income, in which case, the current and deferred tax are also recognized in other comprehensive income.
Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting
for the business combination.
In the application of the Companys accounting policies, which are described in Note 3, the management is required to make judgments,
estimates and assumptions which are based on historical experience and other factors that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed by the management on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the key assumptions concerning the future, and other key sources of estimation and uncertainty at the end of the reporting
period. Actual results may differ from these estimates.
The Companys project agreements are mainly to provide one or more
equipment or services to customers. In order to fulfill the agreements, another party may be involved in some agreements. The Company considers the following factors to determine whether the Company is a principal of the transaction: whether the
Company is the primary obligation provider of the agreements, its exposures to inventory risks and the discretion in establishing prices, etc. The determination of whether the Company is a principal or an agent will affect the amount of revenue
recognized by the Company. Only when the Company is acting as a principal, gross inflows of economic benefits arising from transactions is recognized as revenue.
When there is objective evidence showed
indications of impairment, the Company considers the estimation of future cash flows. The amount of impairment will be measured at the difference between the carrying amount and the present value of estimated future cash flows discounted by the
original effective interest rates of the financial assets. However, as the impact from discounting short-term receivables is not material, the impairment of short-term receivables is measured at the difference between the carrying amount and the
estimated undiscounted future cash flows. Where the actual future cash flows are lower than expected, a material impairment loss may arise.
Inventories are stated at the lower of cost
or net realizable value. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made at the end of reporting period. These estimates take into consideration fluctuations of price or cost
directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. Inventory write-downs are determined on an item by item basis, except for those similar items
which could be categorized into the same groups. The Company uses the inventory holding period and turnover as the evaluation basis for inventory obsolescence losses.
In the process of evaluating the potential
impairment of tangible and intangible assets, the Company is required to consider internal and external indicators of impairment and make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and
expenses related to the specific asset groups within the context of the telecommunication industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges in future
periods.
As discussed in Note 3, Summary of
Significant Accounting PoliciesProperty, Plant and Equipment, the Company reviews estimated useful lives of property, plant and equipment at the end of each year.
Net defined benefit liabilities and the
resulting pension expense under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes
in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.
As discussed in Note 3, some entities are subsidiaries of the
Company although the Company only owns less than 50% ownership interests in these entities. After considering the Companys absolute size of holding in the entity and the relative size of and the dispersion of shares owned by the other
stockholders, and the contractual arrangements between the Company and other investors, potential voting interests and the written agreement between stockholders, the management concluded that the Company has a sufficiently dominant voting interest
to direct the relevant activities of the entity and therefore the Company has control over these entities.
The Company has applied the amendments to IFRSs included in the Annual Improvements to IFRSs 2012- 2014 Cycle, Amendments to IAS 1: Disclosure
Initiative, and Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization for the first time in 2016. The application of these amendments has had no impact on the disclosures or amounts recognized in the
Companys consolidated financial statements.
Except for the following items, the Company believes the adoption of the aforementioned new and
revised IFRSs will not have material impact on the Companys consolidated financial statements.
IFRS 15
establishes principles for recognizing revenue that apply to all contracts with customers, and will supersede IAS 18 Revenue, IAS 11 Construction Contracts and a number of revenue-related interpretations.
When applying IFRS 15, the Company shall recognize revenue by applying the following steps:
Upon the application of
IFRS 15 and its related amendments, the Company will allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis.
Where the Company enters into transactions which involve both the provision of telecommunications service bundled with products such as
handsets, total consideration received from products and telecommunications service in these arrangements is allocated based on each performance obligations relative selling price. The amount of sales revenue recognized for products is no
longer limited to the amount paid by the customer for the products. This will not change the total revenue recognized, but will change the timing of revenue recognition. The Company may recognize more revenue at the beginning of the contract period
(i.e., at the time of sale of products), and revenue recognized for telecommunications service in the subsequent contract periods will decrease.
Incremental costs of obtaining a contract will be recognized as an asset to the extent the Company expects to recover those costs. Such asset
will be amortized on a basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. This will lead to the later recognition of charges for certain customer-obtaining costs.
IFRS 15 and its related amendments require that when another party is involved in providing goods or services to a customer, the Company is a
principal if it controls the specified good or service before that good or service is transferred to a customer. Before the application of IFRS 15, the Company determines whether it is a principal or an agent based on its exposure to the significant
risks and rewards associated with the sale of goods or the rendering of services.
When IFRS 15 and its amendments become effective,
entities may elect to apply this Standard and the related amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this Standard recognized at the date of initial
application. The Company is currently evaluating these transition methods and the related impacts on the Companys consolidated financial statements.
IFRS 16 sets out the accounting standards for leases that will
supersede IAS 17 and a number of related interpretations.
Under IFRS 16, if the Company is a lessee, it shall recognize right-of-use
assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Company may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the
low-value and short-term leases. On the consolidated statements of comprehensive income, the Company should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability and
discloses such amounts in the footnotes; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for the principal portion of the lease liability are classified within financing
activities; cash payments for interest portion are classified within operating activities.
The application of IFRS 16 is not expected to
have a material impact on the accounting of the Company as lessor.
When IFRS 16 becomes effective, the Company may elect to apply this
Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this Standard recognized at the date of initial application.
Except for the abovementioned impact, as of the date the consolidated financial statements were authorized for issue, the Company is
continuously assessing the possible impact that the application of other standards and interpretations will have on the Companys financial position and operating result, and will disclose the relevant impact when the assessment is completed.
The Company maintains its accounts and expresses its consolidated
financial statements in New Taiwan dollars. For readers convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars as set forth in the statistical release
of the Federal Reserve Board of the United States as of December 30, 2016, which was NT$32.40 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or any other rate of exchange.
The annual yield rates of bank deposits, commercial paper, negotiable certificate of deposit and time deposits
as of balance sheet dates were as follows:
Outstanding forward exchange contracts not designated for hedge as of balance sheet dates were as follows:
The Company entered into the above forward exchange contracts to manage its exposure to foreign currency risk
due to fluctuations in exchange rates. However, the aforementioned derivatives did not meet the criteria for hedge accounting.
CHI evaluated and concluded its listed available-for-sale financial assets were partially impaired and
recorded an impairment loss of $26 million for the year ended December 31, 2015. Chunghwa evaluated and concluded its listed available-for-sale financial assets were impaired and recorded an impairment loss of $577 million for the year ended
December 31, 2016.
The fair values of the above non-listed stocks investments cannot be reliably measured due to the range of
reasonable fair value estimates was so significant, the above non-listed stocks investments owned by the Company were carried at costs less any impairment losses at the balance sheet dates.
The Company disposed non-listed available-for-sale financial assets with carrying amounts of $6 million, $2 million and $9 million for the
years ended 2014, 2015 and 2016, respectively, and recognized the gains (losses) from the disposal of $1 million, $(0.4) million and $1 million for the years ended December 31, 2014, 2015 and 2016, respectively.
After the Company evaluated the financial positions and future operation results of non-listed available-for-sale financial assets, the
Company concluded some of its investments that have ceased their operations were fully impaired, and recognized an impairment loss of $9 million, $77 million and nil for the years ended December 31, 2014, 2015 and 2016, respectively. In
addition, some of its investments were encountering profit recession or deficit. The Company concluded the recoverable amount of such investments which represented present value of estimated future cash flows discounted at the current market rate of
return for a similar financial asset or based on the market approach using financial indicators such as PE ratios of the comparable listed companies was lower than the carrying amount. Therefore, the Company recognized impairment losses of $14
million, $4 million and nil for the years ended December 31, 2014, 2015 and 2016, respectively.
The related information of corporate bonds and bank debentures as of balance sheet dates was as follows:
The average credit terms range from 30 to 90 days. In determining the recoverability of trade
notes and accounts receivable, the Company considers significant change in the credit quality of the trade notes and receivables from the date credit was initially granted up to the end of the reporting period. In general, with few exceptional
cases, it is unlikely for the notes and accounts receivable due longer than 180 days to be collected, therefore the Company recognized 100% allowance of notes and accounts receivable overdue longer than 180 days. For the notes and accounts
receivable less than 180 days, the allowance for doubtful accounts was estimated based on the Companys historical recovery experience.
The Company serves a large consumer base; therefore, the concentration of credit risk is limited.
The aging analysis for trade notes and accounts receivable as of balance sheet dates was as follows:
At the balance sheet dates, the receivables that were past due but not impaired were considered recoverable by the management of the Company.
The aging of these receivables as of balance sheets dates was as follows:
The operating costs related to inventories were $51,341 million, $52,666 million and $54,183 million for the
years ended December 31, 2014, 2015 and 2016, respectively.
For the years ended December 31, 2014, 2015 and 2016, the valuation
loss on inventories recognized as operating costs included the amounts of $288 million, $198 million and $192 million, respectively.
As
of December 31, 2015 and 2016, inventories of $2,063 million and $2,074 million, respectively, were expected to be recovered for a time period longer than twelve months. The aforementioned amount of inventories is related to property
development owned by LED.
Land held under development and construction in progress on December 31, 2015 and 2016 was developed by
LED for Qingshan Sec., Dayuan Dist., Taoyuan City project.
The annual yield rates of time deposits and negotiable certificates of deposit with maturities of more than
three months at the balance sheet dates were as follows:
The table below shows details of
less than wholly owned subsidiaries of the Company that have material noncontrolling interests:
Summarized financial information in respect of SENAO and its subsidiaries that has material noncontrolling
interests is set out below. The summarized financial information below represents amounts before intracompany eliminations.
The Companys equity ownership of CHPT
decreased from 50.62% as of January 1, 2014 to 47.65% as of December 31, 2014 due to CHI did not participate the CHPTs capital increase in August and September 2014. CHI disposed of some shares of CHPT in January 2015, and the
ownership interest of CHPT decreased from 47.65% to 45.68%. The Companys equity ownership of CHPT decreased to 40.79% as of December 31, 2016 due to CHI disposed of some shares of CHPT and did not participate the CHPTS capital
increase in March 2016.
SENAO participated in share subscription of Youth in December 2015 at a percentage different from its original
ownership interest. Therefore, the ownership interest of Youth increased from 70% to 89.48%.
SENAO purchased its treasury stock in June and July 2015, and the Companys ownership
interest of SENAO increased from 28.18% to 29.31%.
The above transactions were accounted for as equity transactions since the Company did
not cease to have control over these subsidiaries.
The detailed information of the equity transactions for the years ended
December 31, 2014, 2015 and 2016 was as follows:
Youth and its subsidiaries were acquired in cash in order to continue the expansion of
SENAOs activities in selling telecommunications products.
Goodwill that arose in the acquisition of Youth and its subsidiaries mainly included the amount in relation
to the benefit of expected synergies from integrating the businesses of Youth and its subsidiaries into the Company that operate sales and maintenance of Apples products for many years. These benefits were not recognized separately from
goodwill because they did not meet the recognition criteria for identifiable intangible assets.
Goodwill arising from business combinations is not deductible for tax purposes.
SENAO performed impairment test of goodwill arising from the above acquisition and concluded that no impairment loss was required to
recognize for the years ended December 31, 2015 and 2016.
The
results of the acquired subsidiaries financial performance from the acquisition date to December 31, 2015, were as follows:
Had these business combinations been in effect at the beginning of the annual reporting period, the
Companys pro-forma revenue and net income would have been $232,187 million and $42,774 million, respectively, for the year ended December 31, 2015. This pro-forma information is for illustrative purposes only and is not necessarily an
indication of revenue and results of operations of the Company that actually would have been achieved had the acquisition been completed on January 1, 2015, nor is it intended to be a projection of future results.
In determining the pro-forma revenue and net income of the Company had Youth and its subsidiaries been acquired at the beginning of 2015,
management calculated depreciation of property, plant and equipment and amortization of intangible assets acquired on the basis of the fair values arising in the initial accounting for the business combination rather than the carrying amounts
recognized in the pre-acquisition financial statements.
The percentages of ownership and voting rights in associates held by the Company as of balance sheet dates
were as follows:
None of the above associates is considered individually material to the Company. Summarized
financial information of associates that are not individually material was as follows:
The Level 1 fair values based on the closing market prices of SNI as of the balance sheet dates were as
follows:
Chunghwa did not participate in the capital increase of KWT in August 2014 and November 2014 and the ownership
interest decreased to 27% after the capital increase of KWT. Chunghwa sold its partial ownership interest in KWT in January 2015. The gain on disposal of KWT was $7 million and the ownership interest decreased to 26% after the disposal.
Chunghwa and Taiwan International Ports Corporation, Ltd. established TIPL in October 2014. Chunghwa invested $80 million cash and held 27%
ownership interest of TIPL. TIPL engages mainly in logistics service of increasing cargo movement efficiency.
DZIM increased its capital
in April 2014 and June 2014. Chunghwa participated in the capital increase of DZIM by investing $49 million in April 2014. SENAO participated in the capital increase of DZIM by investing $24 million in April 2014. As of December 31, 2016, the
Company held 26% ownership interest of DZIM. DZIM engages mainly in information technology service and general advertisement service.
CHYP participated in the capital increase of CF by investing $39 million and $6 million in November 2014 and April 2015, respectively. CHYP
holds 49% ownership interest of CF. CF engages mainly in advertisement services.
Chunghwa did not participate in the capital increase of
ADT in April 2014 and October 2014, and the ownership interest decreased to 13% after the capital increase of ADT. Chunghwa participated in the capital increase of ADT by investing $30 million in December 2016 at a percentage different from its
original ownership interest and the ownership interest of ADT increased to 14%. Chunghwa still has one out of five seats in the Board of Directors of ADT after the capital increase. Therefore, Chunghwa remains significant influence over ADT. ADT
engages mainly in the development of mobile payments and information processing service.
Sertec completed its liquidation in June 2015.
CHI recognized the gain on disposal of Sertec of $1 million and received the proceeds from disposal in July 2015.
CHI disposed all
ownership interest in Panda Monium Company Ltd. in September 2015.
Prime Asia participated in the capital increase of MeWorks by investing $10 million and held 20%
ownership in May 2014. Based on the share of capital commitments, Prime Asia has two seats out of five seats in the Board of Directors; therefore it has significant influence over MeWorks. As the operation of MeWorks ceased, the Company concluded
that this investment was fully impaired. The Company recognized an impairment loss of $8 million for the year ended December 31, 2015. MeWorks engages mainly in investment business.
The Companys share of profit (loss) and other comprehensive income (loss) of associates was recognized based on the audited financial
statements.
In March 2016, the stockholders of HDD approved that HDD should start its dissolution from March 31,
2016. Chunghwa received the proceeds from the liquidation in September 2016 and recognized the disposal loss of $0.4 million. The liquidation of HDD was completed in March 2017.
Chunghwa invested in CBO in February 2014 at $50 million cash to acquire 50% of its shares and the rest of 50% ownership interest was held by
Benefit One Asia Pte. Ltd. (BOA), and each obtained half of director seats. Thus, neither Chunghwa nor BOA obtained control over CBO. CBO engages mainly in e-commerce business for employees of corporate members and personal customers. In
December 2016, the stockholders of CBO approved that CBO should start its dissolution from December 31, 2016. The liquidation of CBO is still in process.
None of the above joint ventures is considered individually material to the Company. Summarized financial information of joint ventures that
was not material to the Company was as follows:
The Companys share of loss of joint ventures was recorded based on the audited financial
statements.
Due to technology upgrade, some telecommunications equipment became obsolete in 2014 and 2015. The Company determined that some
telecommunications equipment was impaired in 2016 due to the expiration of 2G license in June 2017 which will lead to the termination of the related service. The Company evaluated and concluded the recoverable amount determined on the basis of value
in use of aforementioned telecommunications equipment was lower than the carrying value, and recognized impairment losses of $0.064 million, $138 million and $596 million for the years ended December 31, 2014, 2015 and 2016, respectively. In
addition, the Company evaluated and concluded the recoverable amount of partial computer and miscellaneous equipment was nil and recognized impairment losses of $0.4 million for the year ended December 31, 2016. The impairment loss was included
in other income and expenses in the statements of comprehensive income.
Depreciation expense is computed using the straight-line method
over the following estimated service lives:
Depreciation expense is computed using the straight-line method over the following estimated service lives:
After the evaluation of land and buildings, the Company concluded the recoverable amount which represented the
fair value less costs to sell of some land and buildings was higher than the carrying amount in 2015 and 2016. Therefore, the Company recognized reversals of impairment loss of $142 million and $148 million for the years ended December 31, 2015
and 2016, respectively, and the amounts were recognized only to the extent of impairment losses that had been recognized in prior years. The reversal of impairment loss was included in other income and expenses in the statements of comprehensive
income.
LED disposed its investment property in October 2014. The disposal price is $1,230 million, related cost is $625 million
(including carrying value of $610 million and related disposal expense of $15 million), and the disposal gain was $605 million.
The fair values of the Companys investment properties as of December 31, 2015 and 2016
were determined by Level 3 fair value measurements inputs based on the appraisal reports conducted by independent appraisers. Those appraisal reports are based on the comparison approach, income approach or cost approach. Key assumptions and the
fair values were as follows:
All of the Companys investment properties are held under freehold interest.
For long-term business development, Chunghwa participated in mobile broadband license (4G license) in 2.5 and 2.6 GHz bands bidding process
announced by NCC and obtained certain spectrums. Chunghwa paid the 4G concession fees amounting to $9,955 million in December 2015.
The
concessions are granted and issued by the NCC. The concession fees are amortized using the straight-line method from the date operations commence through the date the license expires. The carrying amount of 3G concession fee will be fully amortized
by December 2018, and 4G concession fees will be fully amortized by December 2030 and December 2033.
The computer software is amortized
using the straight-line method over the estimated useful lives of 1 to 10 years. Other intangible assets are amortized using the straight-line method over the estimated useful lives of 3 to 20 years. Goodwill is not amortized.
Other financial assetsnoncurrent was Piping Fund. As part of the governments effort to upgrade the
existing telecommunications infrastructure, Chunghwa and other public utility companies were required by the ROC government to contribute to a Piping Fund administered by the Taipei City Government. This fund was used to finance various
telecommunications infrastructure projects. Net assets of this fund will be returned proportionately after the project is completed.
Chunghwas hedge strategy is to enter forward exchange contractsbuy to avoid its foreign currency
exposure to certain foreign currency denominated payments in the following six months. In addition, Chunghwas management considers the market condition to determine the hedge ratio, and enters into forward exchange contracts with the banks to
avoid the foreign currency risk.
Chunghwa signed equipment purchase contracts with suppliers, and entered into forward exchange
contracts to avoid foreign currency risk exposure to Euro-denominated purchase commitments. Those forward exchange contracts were designated as cash flow hedges. For the years ended December 31, 2014, 2015 and 2016, gain (loss) arising from
changes in fair value of the hedged items recognized in other comprehensive income was loss of 0.3 million, gain of $1 million and loss of $1 million, respectively. Upon the completion of the purchase transaction, the amount deferred and
recognized in equity initially will be reclassified into equipment as its carrying value.
As of December 31, 2015 and 2016, Chunghwa
expected part of the equipment purchase transactions will not occur and reclassified the related loss of $1 million and gain of $1 million, respectively, arising from the forward exchange contracts of the aforementioned transactions from equity to
profit or loss.
The outstanding forward exchange contracts at the balance sheet dates were as follows:
Loss (gain) arising from the hedging derivative financial instruments that have been reclassified from equity
to initial cost of the property, plant and equipment were as follows:
LED obtained a secured loan from Chang Hwa Bank in September 2010. Interest is paid monthly. $300 million and
$1,350 million were originally due in December 2014 and September 2015, respectively. In October 2014, the bank borrowing mentioned above was extended to September 2018 for one time repayment. LED made an early repayment of $50 million in April
2015. LED obtained another secured loan from Chang Hwa Bank in December 2012 in the amount of $400 million which is due in December 2017; LED made early repayments of $350 million and $50 million in 2013 and January 2015, respectively.
CHPT entered into a secured loan contract of $348 million with Bank of Taiwan in April 2014, interest is paid monthly, amortization of
principal began in May 2016, and the loan is due in April 2029. CHPT made early repayments of $148 million, $50 million and $150 million from September to December 2014, in November 2015 and from March to April 2016, respectively.
Trade notes and accounts payable were attributable to operating activities and the trading conditions were
agreed separately.
Advance receipts are mainly from advance telecommunication charges. In
accordance with NCCs regulation named Mandatory and Prohibitory Provisions To Be Included In Standard Contracts for Telecommunication Goods (Services) Coupons, the Company entered into a contract with Bank of Taiwan to provide a
performance guarantee for advance receipts from selling prepaid cards amounting to $779 million as of December 31, 2016.
The pension plan under the Labor Pension Act of ROC (the
LPA) is considered as a defined contribution plan. Based on the LPA, Chunghwa and its domestic subsidiaries make monthly contributions to employees individual pension accounts at 6% of monthly salaries and wages. Its foreign
subsidiaries would make monthly contributions based on the local pension requirements.
Chunghwa completed its privatization plans on August 12, 2005.
Chunghwa is required to pay all accrued pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization in accordance with the Statute
Governing Privatization of Stated-owned Enterprises. After paying all pension obligations for privatization, the plan assets of Chunghwa should be transferred to the Fund for Privatization of Government-owned Enterprises (the Privatization
Fund) under the Executive Yuan. On August 7, 2006, Chunghwa transferred the remaining balance of fund to the Privatization Fund. However, according to the instructions of MOTC, Chunghwa was requested to administer the distributions to
employees for pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization and recognized in other current monetary assets.
Chunghwa and its subsidiaries SENAO, CHIEF, CHSI, and SHE with the pension mechanism under the Labor Standards Law are considered as defined
benefit plans. These pension plans provide benefits based on an employees length of service and average six-month salary prior to retirement. Chunghwa and its subsidiaries contribute an amount no more than 15% of salaries paid each month to
their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the names of the Committees in the Bank of Taiwan. The plan assets are held in a commingled fund
which is operated and managed by the governments designated authorities; as such, the Company does not have any right to intervene in the investments of the funds. According to the Article 56 of the Labor Standards Law of the ROC revised in
February 2015, entities are required to contribute the difference in one appropriation to the Funds before the end of next March when the balance of the Funds is insufficient to pay employees who will meet the retirement eligibility criteria within
next year.
The amounts included in the consolidated balance sheets arising from the Companys obligation in respect of its defined
benefit plans were as follows:
Movements in the defined benefit obligation and the fair value of plan assets were as follows:
Relevant pension costs recognized in profit and loss for defined benefit plans were as follows:
The Company is exposed to following risks for the defined benefits plans under the Labor Standards Law:
Under the Labor Standards Law, the rate of return on assets shall not be lower
than the average interest rate on a two-year time deposit published by the local banks and the government is responsible for any shortfall in the event that the rate of return is less than the required rate of return. The plan assets are held in a
commingled fund mainly invested in foreign and domestic equity and debt securities and bank deposits which is operated and managed by the governments designated authorities; as such, the Company does not have any right to intervene in the
investments of the funds.
The decline in government bond interest rate will increase the present
value of the obligation on the defined benefit plan, while the return on plan assets will increase. The net effect on the present value of the obligation on defined benefit plan is partially offset by the return on plan assets.
The calculation of the present value of defined benefit obligation is referred to
the plan participants future salary. Hence, the increase in plan participants salary will increase the present value of the defined benefit obligation.
The most recent actuarial valuation of plan assets and the present value of the defined benefit obligation were carried out by the independent
actuary.
The principal assumptions used for the purpose of the actuarial valuations were as follows:
If reasonably possible changes of the respective significant actuarial assumptions occur at the end of reporting periods,
while holding all other assumptions constant, the present value of the defined benefit obligation would increase (decrease) as follows:
The sensitivity analysis presented above may not be representative of the actual change in the present value
of the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the
projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognized in the consolidated balance sheets.
There is no change in the methods and assumptions used in preparing the sensitivity analysis from
the previous period.
The Companys maturity analysis of the undiscounted benefit payments as of December 31, 2016 was as
follows:
The issued common stocks of a par value at $10 per share entitled the right to vote and receive dividends.
The MOTC and some stockholders sold some common stocks of Chunghwa
in an international offering of securities in the form of American Depositary Shares (ADS) (one ADS represents 10 common stocks) in July 2003, August 2005, and September 2006. The ADSs were traded on the New York Stock Exchange
since July 17, 2003. As of December 31, 2016, the outstanding ADSs were 351 million common stocks, which equaled 35 million units and represented 4.52% of Chunghwas total outstanding common stocks.
The ADS holders generally have the same rights and obligations as other common stockholders,
subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders are entitled to, through deposit agents:
The adjustments of additional paid-in capital for the years ended
December 31, 2014, 2015 and 2016 were as follows:
Additional paid-in capital from share premium, donated capital and the difference between consideration received and the
carrying amount of the subsidiaries net assets upon disposal may be utilized to offset deficits; furthermore, when Chunghwa has no deficit, it may be distributed in cash or capitalized, which however is limited to a certain percentage of
Chunghwas paid-in capital.
The additional paid-in capital from movements of paid-in capital arising from changes in equities of subsidiaries may
only be utilized to offset deficits. Additional paid-in capital from movements of investments in associates and joint ventures accounted for using equity method may not be used for any purpose.
In accordance with the amendments to the Company Act of
the ROC in May 2015, the recipients of dividends and bonuses are limited to stockholders and do not include employees. To comply with the above amendments to the Company Act of the ROC, amendments to the policy on dividend distribution and the
addition of the policy on distribution of employees and directors compensation in Chunghwas Articles of Incorporation were approved by the stockholders in their meeting on June 24, 2016.
In accordance with the Chunghwas amended Articles of Incorporation, Chunghwa must pay all outstanding taxes, offset deficits in prior
years and set aside a legal reserve equal to 10% of its net income before distributing a dividend or making any other distribution to stockholders, except when the accumulated amount of such legal reserve equals to Chunghwas total issued
capital, and depending on its business needs or requirements, may also set aside or reverse special reserves. No less than 50% of the remaining earnings comprising remaining balance of net income, if any, plus cumulative undistributed earnings shall
be distributed as stockholders dividends, of which cash dividends to be distributed shall not be less than 50% of the total amount of dividends to be distributed. If cash dividend to be distributed is less than $0.10 per share, such cash
dividend shall be distributed in the form of common stocks.
For the information on remuneration for the employees and directors based on
the Chunghwas pre-amended and amended Articles of Incorporation, please refer to Note 31.g. Employee benefit expenses.
Special
reserve was appropriated in accordance with the relevant laws and regulations or as requested by local authority. Pursuant to existing regulations, Chunghwa is required to set aside additional special reserve equivalent to debit balances under
stockholders equity. For subsequent decrease in the deduction amount to stockholders equity, the decreased amount could be reversed from the special reserve to retained earnings.
The appropriation for legal reserve shall be made until the accumulated reserve equals the aggregate par value of the outstanding capital
stock of Chunghwa. This reserve can only be used to offset a deficit, or, when the legal reserve has exceeded 25% of Chunghwas paid-in capital, the excess may be transferred to capital or distributed in cash.
Except for non-ROC resident stockholders, all stockholders receiving the dividends are entitled to a tax credit equal to their proportionate
share of the income tax paid by the Company.
The appropriations of the 2014 and 2015 earnings of Chunghwa approved by the stockholders in
their meetings on June 26, 2015 and June 24, 2016 were as follows:
The appropriations of earnings for 2016 had been proposed by Chunghwas Board of Directors
on March 7, 2017. The appropriations and dividends per share were as follows:
The appropriations of earnings for 2016 are subject to the resolution of the stockholders meeting
planned to be held on June 23, 2017.
The exchange
differences arising from the translation of the foreign operations from their functional currency to New Taiwan dollars were recognized as exchange differences arising from the translation of the foreign operations in other comprehensive income.
Unrealized gain (loss) on available-for-sale financial assets were accumulated gains and losses on the
available-for-sale financial assets measured at fair value, which were recognized in other comprehensive income and were included in the calculation of the related disposal gain and loss or impairment loss of such financial assets upon reclassified
to profits or losses.
The main source of revenue of the Company includes various telecommunications
services in various different streams, and the related information was as discussed in Note 43.
The bonus to employees and the remuneration to directors as of December 31, 2014 were accrued based on
past experiences and the probable amount to be paid in accordance with Chunghwas Articles of Incorporation and Implementation Guidance for the Employees Bonus Distribution of Chunghwa Telecom Co., Ltd. According to the Company Act as
amended in May 2015 and the amendments to the Chunghwas Articles of Incorporation approved by the Chunghwas stockholders in their meeting on June 24, 2016, Chunghwa distributes employees compensation at the rates from 1.7% to
4.3% and remuneration to directors not higher than 0.17%, respectively, of pre-tax income. Chunghwa accrued employees compensation and remuneration to directors according to the aforementioned policy for the years ended December 31, 2015
and 2016. As of December 31, 2016, the payables of the employees compensation and of the remuneration to directors were $1,702 million and $42 million, respectively. Such amounts have been approved by the Chunghwas Board of
Directors on March 7, 2017 and will be reported to the stockholders in their meeting planned to be held on June 23, 2017.
If there is a change in the proposed amounts after the annual financial statements are authorized
for issue, the differences are recorded as a change in accounting estimate.
The appropriations of the 2014 bonuses to employees and
remuneration to directors of Chunghwa were approved by the stockholders in their meeting on June 26, 2015. The appropriations of the 2015 employees compensation and remuneration to directors of Chunghwa were approved by the Board of
Directors on March 11, 2016 and reported to the stockholders in their meeting after the amendments to Chunghwas Articles of Incorporation was approved by the Chunghwas stockholders in their meeting on June 24, 2016. The related
information was as follows:
There was no difference between the initial accrual amounts and the amounts paid of the aforementioned
compensation or bonus to employees and the remuneration to directors.
The applicable tax rate used above is the corporate tax rate of 17% payable by the entities subject to the
Income Tax Act of the Republic of China, while the applicable tax rate used by subsidiaries in China is 25%. Tax rates used by other entities in the Company operating in other jurisdictions are based on the tax laws in those jurisdictions.
The movements of deferred income tax assets and
liabilities were as follows:
All Chunghwas earnings generated prior to June 30, 1988 have been appropriated.
The creditable ratios for distribution of earnings of 2015 and 2016 were 20.48% and 20.48% (estimated ratio), respectively.
Effective from January 1, 2015, the creditable ratio for individual stockholders residing in the Republic of China is half of the original creditable ratio according to the revised Article 66-6 of the Income Tax Act of the ROC.
The actual imputation credits allocated to stockholders of the Chunghwa was based on the balance of the Imputation Credit Accounts (ICA) as of the date of
dividend distribution. Therefore, the estimated creditable ratio for the 2016 earnings may differ from the actual creditable ratio to be used in allocating imputation credits to the stockholders.
Income tax returns of Chunghwa have been examined by the tax authorities through 2014
(except 2013). Income tax returns of SENAO have been examined by the tax authorities through 2013. Income tax returns of Youth, SHE and CEI have been examined by the tax authorities through 2014. Income tax returns of LED (except 2014), CHIEF, HHI,
CHI, CHSI, CHYP, CHPT, SFD, ISPOT, Youyi, Aval, Unigate and CHST have been examined by the tax authorities through 2015. Income tax returns of CEIs 2015 current final reports on total business income to liquidation date and on income earned
from liquidation have been examined by the tax authorities.
Net income and weighted average number of common stocks used in the
calculation of earnings per share were as follows:
Because Chunghwa may settle the employee bonus or employee compensation in shares or cash, Chunghwa shall
presume that it will be settled in shares and takes those shares into consideration when calculating the weighted average number of outstanding shares used in the calculation of diluted EPS if the shares have a dilutive effect. The dilutive effect
of the shares needs to be considered until the approval of the number of shares to be distributed to employees as compensation in the following year.
Each option is eligible to subscribe for one common share when exercisable. Under the terms of the SENAO Plan,
the options are granted at an exercise price equal to the closing price of the SENAOs common stocks listed on the TWSE on the higher of closing price or par value. The SENAO Plan have exercise price adjustment formula upon the changes in
common stocks equity (including cash capital increase, new share issue through capitalization of earnings and additional paid-in capital, merger, spin off and new share issue for Global Depositary Shares, and so on) or distribution of cash
dividends. The options of SENAO Plan are valid for six years and the graded vesting schedule for which 50% of option granted will vest two years after the grant date and another two tranches of 25%, each will vest three and four years after the
grant date respectively.
Stock options granted on May 7, 2013 applied IFRS 2. The recognized compensation costs were $93 million,
$35 million and $13 million for the years ended December 31, 2014, 2015 and 2016, respectively.
SENAO modified the plan terms of the
outstanding stock options in July 2014, the exercise price changed from $89.40 to $84.30 per share. The modification did not cause any incremental fair value granted.
SENAO modified the plan terms of the outstanding stock options in August 2015, the exercise price changed from $84.30 to $81.40 per share. The
modification did not cause any incremental fair value granted.
SENAO modified the plan terms of the outstanding stock options in July
2016, the exercise price changed from $81.40 to $76.10 per share. The modification did not cause any incremental fair value granted.
Information about SENAOs outstanding stock options for the years ended December 31, 2014, 2015 and 2016 was as follows:
As of December 31, 2015 information about employee stock options outstanding was as follows:
As of December 31, 2016 information about employee stock options outstanding was as follows:
SENAO used the fair value method to evaluate the options using the Black-Scholes model and the related
assumptions and the fair value of the options were as follows:
Expected volatility was based on the historical share price volatility of SENAO over the period equal to the
expected life of SENAO Plan.
Each option is eligible to subscribe for one thousand common stocks when exercisable. Under the terms of the
CHIEF Plan, the options are granted at an exercise price equal to $43.00. The options are granted to specific employees that meet the vesting conditions. The CHIEF Plan has exercise price adjustment formula upon the changes in common stocks or
distribution of cash dividends. The options of CHIEF Plan are valid for five years and the graded vesting schedule will vest two years after the grant date.
Stock options granted on October 22, 2015 applied IFRS 2. The recognized compensation cost were $1 million and $4 million for the years
ended December 31, 2015 and 2016, respectively.
CHIEF modified the plan terms of the outstanding stock options in July 2016, the
exercise price changed from $43.00 to $34.40 per share. The modification did not cause any incremental fair value granted.
Information about CHIEFs outstanding stock options for the years ended December 31,
2015 and 2016 was as follows:
As of December 31, 2015, information about employee stock options outstanding was as follows:
As of December 31, 2016, information about employee stock options outstanding was as follows:
CHIEF used the fair value method to evaluate the options using the binomial option pricing model
and the related assumptions and the fair value of the options were as follows:
Expected volatility was based on the average annualized historical share price volatility of CHIEFs
comparable companies before the grant date.
On
December 8, 2015, the Board of Directors of CHPT approved the cash injection to issue 2,787 thousand shares and simultaneously reserved 418 thousand shares for subscription by employees according to the Company Act of the ROC.
Furthermore, when the employees subscribed some shares or discarded their rights to subscribe shares, the Board of Directors of CHPT authorized the chairman of the Board of Directors to contact specific people or group to subscribe.
The aforementioned options granted to employees are accounted for and measured at fair value in accordance with IFRS 2. The recognized
compensation cost was $0.016 million for the year ended December 31, 2016.
CHPT used the fair value method to evaluate the options
granted to employees on March 10, 2016 using the Black-Scholes model and the related assumptions and the fair value of the options were as follows:
Expected volatility was based on the average annualized historical share price volatility of CHPTs
comparable companies before the grant date.
Except for the ST-2 satellite referred in Note 40 to the consolidated
financial statements, the Company entered into several lease agreements for base stations located all over in Taiwan. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
The Company leases out some land and buildings. The future aggregate
minimum lease collection under non-cancellable operating leases are as follows:
The Company manages its capital to ensure that entities in the
Company will be able to continue as going concerns while maximizing the return to stakeholders through the optimization of the debt and equity balance.
The capital structure of the Company consists of debt of the Company and the equity attributable to the parent.
Some consolidated entities are required to maintain minimum paid-in capital amount as prescribed by the applicable laws.
The management reviews the capital structure of the Company as needed. As part of this review, the management considers the cost of capital and
the risks associated with each class of capital.
According to the managements suggestion, the Company maintains a balanced capital
structure through paying cash dividends, increasing its share capital, purchasing treasury stock, and proceeds from new debt or repayment of debt.
The main financial instruments of the Company include equity and debt investments, accounts receivable, accounts payable and loans. The
Companys Finance Department provides services to its business units, co-ordinates access to domestic and international capital markets, monitors and manages the financial risks relating to the operations of the Company through internal risk
reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), credit risk, and liquidity risk.
The Company seeks to minimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of
financial derivatives is governed by the Companys policies approved by the Board of Directors. Those derivatives are used to hedge the risks of exchange rate fluctuation arising from operating or investment activities. Compliance with policies
and risk exposure limits is reviewed by the Companys Finance Department on a continuous basis. The Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
Chunghwa reports the significant risk exposures and related action plans timely and actively to the audit committee and to the Board of
Directors if needed.
The Company is exposed to market risks of changes in foreign currency exchange
rates and interest rates. The Company uses forward exchange contracts to hedge the exchange rate risk arising from assets and liabilities denominated in foreign currencies.
There were no changes to the Companys exposure to market risks or the manner in which these risks are managed and measured.
The carrying amounts of the Companys foreign currency denominated
monetary assets and monetary liabilities at the balance sheet dates were as follows:
The carrying amounts of the Companys derivatives with exchange rate risk exposures at the
balance sheet dates were as follows:
The Company is mainly exposed to the fluctuations of the currencies listed above.
The following table details the Companys sensitivity to a 5% increase and decrease in the functional currency against the relevant
foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents managements assessment of the reasonably possible changes in foreign exchange rates. The sensitivity
analysis includes only outstanding foreign currency denominated monetary items and forward exchange contracts. A positive number below indicates an increase in pre-tax profit or equity where the functional currency weakens 5% against the relevant
currency.
For a 5% strengthening of the functional currency against the relevant currencies, it would have the equal but opposite effect on the pre-tax
profit or equity for the amounts shown above.
The carrying amounts of the Companys exposures to interest rates on
financial assets and financial liabilities at the balance sheet dates were as follows:
The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative instruments at the end of the
reporting period. A 25 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents managements assessment of the reasonably possible change in interest rates.
If interest rates had been 25 basis points higher/lower and all other variables were held constant, the Companys pre-tax income would
increase/decrease by $6 million, $12 million and $12 million for the years ended December 31, 2014, 2015 and 2016, respectively. This is mainly attributable to the Companys exposure to floating interest rates on its financial assets and
short-term and long-term loan.
The Company is exposed to equity price risks arising from listed equity
investments. Equity investments are held for strategic rather than trading purposes. The management managed the risk through holding various risk portfolios. Further, the Company assigned finance and investment departments to monitor the price risk.
The sensitivity analyses below have been determined based on the exposure to equity price risks at the end of the reporting period.
If equity prices of listed equity securities had been 5% higher/lower, other comprehensive income would have increased/decreased by $196
million, $162 million and $126 million as a result of the changes in fair value of available-for-sale assets for the years ended December 31, 2014, 2015 and 2016, respectively.
Credit risk refers to the risk that a counterparty would default on its
contractual obligations resulting in financial loss to the Company. The maximum credit exposure of the aforementioned financial instruments is equal to their carrying amounts recognized in consolidated balance sheet as of the balance sheet date.
The Company has large trade receivables outstanding with its customers. A substantial majority of the Companys outstanding trade
receivables are not covered by collateral or credit insurance. The Company has implemented ongoing measures including enhancing credit assessments and strengthening overall risk management to reduce its credit risk. While the Company has procedures
to monitor and limit exposure to credit risk on trade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses. This risk is heightened during periods when economic conditions worsen.
As the Company serves a large number of unrelated consumers, the concentration of credit risk was limited.
The Company manages and maintains sufficient cash and cash equivalent position
to support the operations and reduce the impact on fluctuation of cash flow.
The following tables detailed the Companys remaining
contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables had been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company is required
to pay.
The following table detailed the Companys liquidity analysis for its derivative financial
instruments. The table had been drawn up based on the undiscounted gross inflows and outflows on those derivatives that require gross settlement.
The fair value measurement guidance establishes a framework for
measuring fair value and expands disclosure about fair value measurements. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value. These levels are:
Except for what disclosed in the following table, the Company considers that the carrying amounts of finanal assets and liabilities not
measured at fair value approximate their fair values or the fair values cannot be reliable estimated:
The Level 2 fair values are estimated using discounted cash flow models. The models use market-based
observable inputs including duration, yield rate and credit rating.
There were no transfers between Levels 1 and 2 for the years ended December 31, 2015 and 2016. There were
no Level 3 investments measured at fair value on a recurring basis.
The fair values of financial assets and financial liabilities are
determined as follows:
The ROC Government, one of Chunghwas customers has
significant equity interest in Chunghwa. Chunghwa provides fixed-line services, wireless services, internet and data and other services to the various departments and institutions of the ROC Government in the normal course of business and at
arms-length prices. The transactions with the ROC government bodies have not been provided because the transactions are not individually or collectively significant. However, the related revenues and operating costs have been appropriately
recorded.
Chunghwa entered into a contract with ST-2 Satellite Ventures Pte., Ltd. on
March 12, 2010 to lease capacity on the ST-2 satellite. This lease is for 15 years which should start from the official operation of ST-2 satellite and the total contract value is approximately $6,000 million (SG$261 million), including a
prepayment of $3,068 million, and the rest of amount should be paid annually when ST-2 satellite starts its official operation. ST-2 satellite was launched in May 2011, and began its official operation in August 2011. The total rental expense for
the year ended December 31, 2014 was $416 million, which consisted of an offsetting credit of the prepayment of $199 million and an additional accrual of $217 million. The total rental expense for the year ended December 31, 2015 was $404
million, which consisted of an offsetting credit of the prepayment of $204 million and an additional accrual of $200 million. The total rental expense for the year ended December 31, 2016 was $394 million, which consisted of an offsetting
credit of the prepayment of $204 million and an additional accrual of $190 million. The prepaid rents (classified as prepayments) as of December 31, 2015 and 2016, were as follows:
The compensation of directors and other key
management personnel for the years ended December 31, 2014, 2015 and 2016 were as follows:
The compensation of directors and other key management personnel was mainly determined by the compensation
committee having regard to the performance of individual and market trends.
The Companys
remaining commitments under non-cancelable contracts with various parties, excluding those disclosed in other notes, were as follows:
The Company has the following reportable segments that provide
different products or services. The reportable segments are managed separately because each segment represents a strategic business unit that serves different markets. Segment information is provided to CEO who allocates resources and assesses
segment performance. The Companys measure of segment performance is mainly based on revenues and income before income tax. The Companys reportable segments are as follows:
Some operating segments have been aggregated into a single operating segment taking into account
the following factors: (a) similar economic characteristics such as long-term gross profit margins; (b) the nature of the telecommunications products and services are similar; (c) the nature of production processes of the
telecommunications products and services are similar; (d) the type or class of customer for the telecommunications products and services; and (e) the methods used to provide the services to the customers are the same.
There was no material differences between the accounting policies of the operating segments and the accounting policies described in Note 3.
Analysis by reportable segment of revenue and operating results of
continuing operations was as follows:
Other information reviewed by the chief operating decision maker or
regularly provided to the chief operating decision maker was as follows:
The following is an analysis of the Companys revenue
from its major products and services.
The users of the Companys services are mainly from Taiwan, ROC.
The revenues it derived outside Taiwan are mainly revenues from international long distance telephone and leased line services. The geographic information for revenues was as follows:
The Company has long-lived assets in U.S., Singapore, Hong Kong, China, Vietnam, and Japan and except for
$4,041 million and $3,947 million as of December 31, 2015 and 2016, respectively, in the aforementioned areas, the other long-lived assets are located in Taiwan, ROC.
For the years ended December 31, 2014, 2015 and 2016, the Company did not
have any single customer whose revenue exceeded 10% of the total revenues.