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Chunghwa to unwind contract

Chunghwa Telecom Co (中華電信), the nation’s top telecommunication services provider, said its board approved a proposal to unwind a 10-year foreign exchange derivative contract with Goldman Sachs at the proper time, aiming to minimize erosion of the foreign currency asset.

The move aims to “reduce the impact of the unrealized loss to be incurred under the contract on the company’s net income going forward,” Chunghwa Telecom said in a statement issued late on Thursday night.

In an extraordinary meeting on Thursday, the board members agreed to authorize Chunghwa Telecom chief executive officer Lu Shyue-ching (呂學錦) to terminate the foreign contract within a certain amount and in a certain period of time in the future.

The contract, originally due in 2017, fueled jitters among investors as cumulative losses ballooned to around NT$4 billion (US$123.4 million) in February following a strong appreciation of the NT dollar against the US dollar at the time.

Chunghwa Telecom’s latest decision came after the recent depreciation of the NT dollar against the US dollar, which provides a good chance for the company to contain losses from the contract.

The unrealized losses narrowed to NT$1.57 billion at the end of August and decreased to NT$1.1 billion last month after the NT dollar declined by nearly 2 percent against the greenback month on month, Chunghwa Telecom said in a statement released on Thursday.

The NT dollar traded at NT$32.437 against the US dollar on Thursday. The currency has retreated 14.3 percent from a 10-year high of NT$30.01 on March 26, the Taipei Forex Inc’s data showed.

Under the original terms of the deal signed in September of last year to hedge against volatility in foreign exchange rates, the Taiwanese company can receive cash from its counterpart if the NT dollar trades between NT$31.50 and NT$32.70 against the US dollar; otherwise, Chunghwa must pay cash to Goldman if the local currency appreciates to NT$31.50.

Chunghwa Telecom previously projected that unrealized losses from the 10-year contract would be around NT$1.5 billion, but Citigroup estimated the losses incurred from the contract could reach NT$2.6 billion for the whole year, Anand Ramachandran, an equity analyst at Citigroup Global Markets, said in a client note yesterday.

Earlier this week, Chunghwa Telecom reported its net profit dropped 22 percent to NT$4.12 billion last month from NT$5.3 billion in August. In the third quarter, the company’s operating income declined 14 percent year-on-year to NT$14.64 billion while net profit rose 3.24 percent to NT$13.63 billion over the same period.

Citigroup maintained a “buy” rating on the stock of Chunghwa Telecom because of the company’s sound free-cash-flow profile and debt-free balance sheet, with a target price of NT$85. That will represent a 20.5-percent upside potential from the stock’s closing price of NT$72.2 on Thursday.

The financial markets were closed yesterday for the national day holiday.
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