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Chunghwa Telecom Co (CHT) Risk Analysis
Risk Overview Q4, 2023
Source: the company's latest filing for the period ended Dec 31, 2023, filed Apr 17, 2024
Risk Change Over Time
- Regulation - Risk 1Extensive regulation of our industry may limit our flexibility to respond to market conditions and landscape, and our business and revenues may suffer.
As a telecommunications service provider in Taiwan, we are subject to extensive regulation. According to the ROC Telecommunications Management Act, or the TMA, telecommunications enterprises shall register themselves with the NCC and become subject to the TMA. We applied for registration on July 31, 2020, and received approval from the NCC on September 30, 2020. Since then, we have become subject to the TMA. On April 15, 2022, the NCC announced that two retail service markets (i.e., the fixed-line voice market and the fixed-line broadband market) and three wholesale service markets (i.e., the fixed-line wholesale market, fixed-line voice access market and the mobile voice access market) are designated as specific telecommunications service markets; on June 5, 2023, we were officially determined to be the telecommunications enterprise with significant market power in the aforementioned five specific telecommunications service markets subject to special control measures, including fee control, accounting separation, information transparency and non-discrimination treatment. See "Item 4. Information on the Company-B. Business Overview-Regulation" for more information on the regulatory environment. With respect to the special control measures relating to fee control, the NCC announced the promulgation of the "Upper Limits on the Termination Rate for Voice Service over Mobile Network Provided by Significant Market Powers" on May 26, 2023, the promulgation of the "Primary Fees, Adjustment Coefficients and Years of Implementation for Price Cap Control Enforced on Significant Market Power in the Fixed Communication Network Voice Retail Service Market, Fixed Communication Network Broadband Retail Service Market and Fixed Communication Network Wholesale Service Market" on June 2, 2023, and the promulgation of the "Upper Limits on the Termination Rates for Voice Service over Fixed Network Provided by Significant Market Powers" on June 5, 2023, which constrain our ability to raise prices. On March 15, 2024, the NCC announced that, effective from April 1, 2024, the "monthly rental fee of broadband network circuit" were enforced to be reduced by "3.32% minus annual growth rate of the Consumer Price Index (CPI)," excluding the circuits of ADSL, that with download speed at and below 12 Mbps and that with download speed at 300 Mbps and above. For the fixed-line wholesale services, including the private circuits, broadband network wholesale circuits and internet interconnection bandwidth, the fees were enforced to be reduced by "5.09% minus annual growth rate of CPI," excluding the circuits with download speed at and under 2 Mbps. See "Item 4. Information on the Company-B. Business Overview-Regulation" and "Item 5. Operating and Financial Review and Prospects-Overview-Tariff adjustments." We cannot assure you that we will not be required to further reduce our tariffs again in the future. Any mandatory tariff reductions could have a material adverse effect on our revenues. Furthermore, in August 2022, the Ministry of Digital Affairs was launched to partly take over the administrative authorities formerly held by the NCC, the Ministry of Transportation and Communications and the Executive Yuan, respectively, including (1) telecommunications popularization, telecommunication enterprises cyber security management, number portability and equal accessibility, critical telecommunications infrastructure, radio frequencies allocation, as well as management of telecommunications numbers, websites and domain names, formerly held by the NCC; (2) comprehensive communications resources allocation and telecommunication industry counseling and incentives, formerly held by the Ministry of Transportation and Communications; and (3) the cyber security management, formerly held by the Executive Yuan. We are closely monitoring these regulatory changes and related policy development and we cannot assure you that these changes and development will not affect our business.
Risk Highlights Q4, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 32
- Share Price & Shareholder Rights - Risk 1You 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.
- Share Price & Shareholder Rights - Risk 2You 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.
- Share Price & Shareholder Rights - Risk 3We may be sanctioned or the network establishment approval granted to us may be abolished for violations of limits on foreign ownership of our common shares, and these limits may materially and adversely affect our ability to obtain financing.
According to the TMA, which was effective from July 1, 2020 (excluding certain articles regarding frequency allocation that was set effective from November 1, 2020), the total amount of our shares directly held by foreigners shall not exceed 49%, and the total amount of our shares directly and indirectly held by foreigners shall not exceed 60%. As of April 8, 2024, foreign direct holdings of our outstanding share capital was at approximately 15.84%. If we fail to comply with the applicable foreign ownership limitations, the network establishment approval granted to us may be abolished. We cannot predict the manner in which the NCC will exercise its authority over us in the case of a violation, or whether the 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 we have no ability to stop transfers among stockholders, or force particular stockholders to sell their shares, we may be subject to monetary fines, or the network establishment approval granted to us may be abolished, even if there is 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.
- Share Price & Shareholder Rights - Risk 4The 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.
- Share Price & Shareholder Rights - Risk 5Stockholders may have more difficulty protecting their interests under the laws of the ROC than they would under the laws of the U.S.
Our corporate affairs are governed by our Articles of Incorporation, the TMA, 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 landscape, and our business and revenues 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 U.S. 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 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.
- Share Price & Shareholder Rights - Risk 6Our largest stockholder may take actions that conflict with our public stockholders' best interests.
As of December 31, 2023, 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: - any sale of all or substantially all of our assets;- the approval of our annual operation and projects budget;- the composition of our senior management;- the timing and distribution of dividends;- the election of a majority of our directors; and - our business activities and direction. We cannot assure you that our largest shareholder will not take actions that impair our ability to conduct our business competitively or conflict with the best interests of our public stockholders.
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