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Chunghwa's bottom line takes a hit

"These losses, though negative, are not unmanageable ... Surplus cash return and real estate value monetization still hold as positive catalysts."

Anand Ramachandran, Citigroup analyst

Chunghwa Telecom Co (中華電信) said yesterday that accumulated losses over the past three months on a foreign-exchange derivatives contract reached NT$4 billion (NT$128.8 million) as of last month.

The news sent shares of the nation's top telecom operator down NT$0.6 to close at NT$76.8 yesterday, while the benchmark TAIEX gained 0.16 percent.

"The purpose of the contract was to hedge against US dollar-denominated capital spending and settlement fees," Chunghwa Telecom chief financial officer Joseph Shieh (謝劍平) said in a company statement.

The company booked a NT$3 billion charge last month for an unrealized valuation loss from the 10-year foreign currency derivatives contract it entered into with an international investment bank in September last year, the statement said.

The losses led to a 47.4 percent year-on-year decline in Chunghwa Telecom's net income to NT$1.9 billion last month. Sales, however, expanded 3.6 percent at an annual pace to NT$16 billion.

Potential cash payment settlement obligations under the 10-year contract, however, would be lower at about NT$1.5 billion based on the NT dollar's 17-year average exchange rate of 30 to one US dollar, Chunghwa Telecom said, adding that the company believed the losses were within the acceptable limits under its risk management.

Hsieh also said that the losses were unrealized and would not be reflected on its books. He also said Chunghwa Telecom would have a NT$2.4 million foreign exchange gain coming in today.

"These losses, though negative, are not unmanageable. The management is exploring options. Surplus cash return and real estate value monetization still hold as positive catalysts," Anand Ramachandran, an equity analyst at Citigroup Global Markets Inc's Citi Investment Research, said in a report issued yesterday.

Ramachandran forecast a dividend yield of 5.4 percent for Chunghwa based on its earnings of NT$48.48 billion last year.

"We would continue to be buyers into any sustained weakness," Ramachandran said.

Citigroup has a 12-month target price of NT$70 for Chunghwa Telecom.

The company said that the financial officer in charge of the foreign-exchange derivatives contract was disciplined and it would strengthen its risk management.
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