Safe haven, defensive plays
Reiterate BUY on Taiwan telcos: With telecom services playing an
indispensable role in people’s lives, we expect the telecom industry to
be relatively less impacted than other industries during the global
economic storm. Even though we lower our earnings forecasts for the
three operators to reflect the more challenging operational
environment in 2009, we remain positive on the three companies given
their defensive earnings profiles and sustainable high cash yields. We
reiterate our BUY calls on all three Taiwan telcos with Chunghwa
Telecom (CHT) as our top sector pick.
Why we are positive on Taiwan telecom industry?
► Rational competition: The rational competition in Taiwan’s mobile
market is positive for Taiwan telcos, as it has curtailed any
irrational pricing competition. In addition, we believe that CHT will
benefit from minimal competition in the fixed-line market.
► Data services to continue driving growth: We see the 3.5G datacard
as a new driver for all three operators, creating a new market with
limited cannibalization for wireline broadband.
► Improving regulatory environment: We see little likelihood of
further mobile tariff cuts given that 2009 will be the last year of the
three-year 2G mobile voice tariff reduction program. The overall
regulatory environment in Taiwan is becoming increasingly stable,
which bodes well for all three operators.
Investment recommendations: CHT remains our top pick in the Taiwan
telecom space in light of its clear cash return roadmap and diversified
portfolio, helping it to better weather this turbulent environment. We
believe that Taiwan Mobile (TWM) and Far EasTone (FET) will be able to
continue to deliver stable dividends despite no near-term capital
reduction plans. However, given their higher exposure to mobile
services, TWM and FET have a higher level of risks to their earnings
streams than CHT. Overall, we like all three operators as they are
quality defensive plays which offer sustainable high yields (8-9%).

Table of contents
Telecom Industry ..................................................... 1
Rational competition ..................................................................... 3
Data services to continue to drive growth ..................................... 5
Improving regulatory environment ................................................. 7
Investment recommendations ....................................................... 8
Chunghwa Telecom (2412 TT); BUY......................... 10
Taiwan Mobile (3045 TT); BUY................................. 18
Far EasTone (4904 TT); BUY.................................... 26

Rational competition
Mobile market - Stable competitive landscape structure remains
We expect competition in the Taiwan mobile market will remain rational throughout
this year. The aggressively priced tariff packages for free on-net calls from small
operators, including Vibo and Asia Pacific Telecom (APBW), which were launched
around three to four years ago, have proven to be a limited threat to the three-big
operators. Given small operators’ inferior coverage, many users mainly use an
account with a small operator as a second subscriber identity module (SIM), i.e.
carrying a second mobile phone number, to take advantage of its free intranetwork
minutes. Looking forward, we believe small operators may continue to lead
the trend of the second SIM phenomenon, while causing limited pressure on
minutes of usage (MOU) and average revenue per user (ARPU) for the big-three
operators. Meanwhile, we believe the three major operators will maintain the stable
competition landscape structure with very little pricing competition.

Fixed-line market – CHT continues to benefit from its dominant market position
The Local Loop Unbundling (LLU) has not been very successful in Taiwan owing to
the unappealing ULL price (NT$140), which has discouraged competitors. Therefore,
we view CHT as a major beneficiary given its existing dominant position, and
expect the limited competition will help its fixed-line business margin to remain
resilient. Looking forward, CHT will continue to improve its fixed-line infrastructure
and plans to spend NT$150 bn in capex increasing its ‘fiber to the neighborhood’
(FTTN) coverage rate from the current 40% to 83% by 2013. TWM is also working on
rolling out FTTN/FTTH (fiber to the home) in some selective high-density
residential regions; although we feel that this will not materialize fast enough to be
a real threat to CHT in the near future.