|
|
|
|
This Monopolistic Firm is Now Trading 25% Below its Fair Value |
Published: April 19,
2007
Chunghwa Telecom ADR (NYSE: CHT) is a former
state-owned provider of telecommunications services in Taiwan. Thanks to
sweeping regulatory changes enacted a decade ago, privatization has
allowed individual investors a piece of this highly profitable business
-- which conveniently trades as an
American Depositary
Receipt (ADR) on the New York Stock Exchange.
Here in the U.S., the telecom industry is often marked by brutal
competition. While Taiwan also has its share of competition, virtually
no other player comes close to matching up with Chunghwa. The firm is
Taiwan's only integrated operator; it controls a dominant 95%-plus share
of the nation's fixed-line phone business with an established base of
around 13 million traditional phone customers.
As is the case with nearly all telecom companies, the fixed-line segment
is somewhat stagnant. Fortunately, though, the Taiwanese are quite fond
of their cell phones, and the country has a 90% penetration rate in the
wireless market -- among the highest in the world. As the nation's
leading provider of wireless services (with a roughly 40% market share),
Chunghwa rakes in a steady stream of cash flows from its 9 million
users. Many of them have signed up for third-generation (3G) mobile
service -- which is about 30% higher in terms of average revenues per
user.
Finally, the company is also the undisputed leader of broadband Internet
and high-speed data services. This is actually Chunghwa's
fastest-growing segment, and the firm has enrolled more than 350,000 new
broadband Internet subscribers over the past twelve months alone.
From the old to the new, Chunghwa is the clear market leader in all
three telecom service areas: fixed line, wireless, and Internet. Not
only does that lend itself to considerable economies of scale, but as
the nation's only integrated provider, the company has a natural
competitive advantage when it comes to bundling services.
All told, those services generate a steady stream of high-margin
revenues that churn out roughly $2 billion per year in annual free cash
flows. And with relatively light spending needs (capex spending
represented less than 15% of revenues last year), the company is
typically able to return around 90% of its net income to shareholders --
as evidenced by a robust 6.3% dividend yield.
Given the high saturation of the Taiwanese market, Chunghwa is unlikely
to post stellar growth rates. However, revenues still advanced modestly
last year, and operating cash flow climbed a healthy +16%.
The stock is currently trading at a sharp discount to its $27 fair value
estimate, less than two times its book value, and has a rich cash flow
yield in excess of 15%. By comparison, a domestic counterpart like
Verizon also trades around two times book value, but with lower market
share and more competition. It's also worth noting that Chunghwa
maintains a pristine balance sheet for a telecom company -- with more
than $2 billion in cash and almost zero debt.
Thanks for reading!
|
Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
|
| To receive
in-depth guidance on today's leading value opportunities every other weekend, plus educational guidance, please subscribe to
Nathan Slaughter & Paul Tracy's premium value investing newsletter --
Half-Priced
Stocks |
|
|
|
Income Security
of the Month
Our "Income Security of the Month" for August 2008 invests in a
fast-growing overseas market that doesn't get much exposure in the
mainstream financial press. And although it typically makes enormous
annual dividend payments -- it has paid an average dividend of
25.5% per year over the past five years -- this fund is perhaps
most appealing for its total return potential. Specifically, the
fund has delivered total returns of +178.9% since 2003,
and it ranks in the top 10% of its category over the past decade.
|
Top
10 Stocks for 2008!
Since we began publishing this report back in 2003, the picks we've
featured have consistently beaten the broader market -- delivering average
gains of +21.3% per year and outperforming the S&P by a nearly
2-to-1 margin. Act now to reserve your copy of our newest report -- Top
Ten Stocks for 2008. |
|
|
