20-F 1 d167887d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from                 to                

Commission file number 001-31731

 

 

Chunghwa Telecom Co., Ltd.

(Exact name of Registrant as specified in its charter)

Chunghwa Telecom Co., Ltd.

(Translation of Registrant’s name into English)

Taiwan, Republic of China

(Jurisdiction of incorporation or organization)

21-3 Hsinyi Road, Section 1, Taipei, Taiwan, Republic of China

(Address of principal executive offices)

Fufu Shen

21-3 Hsinyi Road, Section 1, Taipei,

Taiwan, Republic of China

Tel: +886 2 2344-5488

Email: chtir@cht.com.tw

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Shares, par value NT$10 per share

American Depositary Shares, as evidenced by American

Depositary Receipts, each representing 10 Common Shares

 

New York Stock Exchange*

New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

7,757,446,545 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes  ¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨ Yes  x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S -T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ¨ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                 Accelerated filer  ¨                 Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board x

     Other   ¨ 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes  x No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  ¨ Yes  ¨ No

 

* Not for trading, but only in connection with the listing on the New York Stock Exchange of the American Depositary Shares

 

 

 


Table of Contents

CHUNGHWA TELECOM CO., LTD.

FORM 20-F ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2015

Table of Contents

 

         Page  

SUPPLEMENTAL INFORMATION

     1   

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

     1   

PART I

     2   

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      2   

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      2   

ITEM 3.

  KEY INFORMATION      2   

ITEM 4.

  INFORMATION ON THE COMPANY      18   

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      66   

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      66   

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      92   

ITEM 7.

  MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS      101   

ITEM 8.

  FINANCIAL INFORMATION      102   

ITEM 9.

  THE OFFER AND LISTING      103   

ITEM 10.

  ADDITIONAL INFORMATION      105   

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      120   

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      122   

PART II

     124   

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      124   

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      124   

ITEM 15.

  CONTROLS AND PROCEDURES      124   

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      126   

ITEM 16B.

  CODE OF ETHICS      126   

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      126   

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      127   

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      127   

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      127   

ITEM 16G.

  CORPORATE GOVERNANCE      127   

ITEM 16H.

  MINE SAFETY DISCLOSURE      130   

PART III

     130   

ITEM 17.

  FINANCIAL STATEMENTS      130   

ITEM 18.

  FINANCIAL STATEMENTS      130   

ITEM 19.

  EXHIBITS      131   

 

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SUPPLEMENTAL INFORMATION

All references to “we,” “us,” “our” and “our company” in this annual report are to Chunghwa Telecom Co., Ltd. and our consolidated subsidiaries, unless the context otherwise requires. All references to “shares” and “common shares” are to our common shares, par value NT$10 per share, and to “ADSs” are to our American depositary shares, each of which represents ten of our common shares. The ADSs are issued under the deposit agreement, as amended, supplemented or modified from time to time, originally dated as of July 17, 2003, among Chunghwa Telecom Co., Ltd. and the Bank of New York, and amended and restated on November 14, 2007, among Chunghwa Telecom Co., Ltd. and JP Morgan Chase Bank, as depository, and the holders and beneficial owners of American Depositary Receipts issued thereunder. All references to “Taiwan” are to the island of Taiwan and other areas under the effective control of the Republic of China. All references to “the government” or “the ROC government” are to the government of the Republic of China. All references to “the Ministry of Transportation and Communications” or “the MOTC” are to the Ministry of Transportation and Communications of the Republic of China. All references to “the National Communications Commission” or “the NCC” are to the National Communications Commission of the Republic of China. All references to the “Securities and Futures Bureau” are to the Securities and Futures Bureau of the Republic of China or its predecessors, as applicable. “ROC GAAP” means the generally accepted accounting principles of the Republic of China, “U.S. GAAP” means the generally accepted accounting principles of the United States, “IFRSs” means International Financial Reporting Standards as issued by the International Accounting Standards Board, and “Taiwan IFRSs” means the International Financial Reporting Standards as issued by the International Accounting Standards Board and endorsed by the Financial Supervisory Commission, or the FSC, which are required to be adopted by applicable companies in the ROC pursuant to the “Framework for Adoption of International Financial Reporting Standards by Companies in the ROC” promulgated by the FSC on May 14, 2009. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. Unless otherwise indicated, or the context otherwise requires, references in this annual report to financial and operational data for a particular year refer to the fiscal year of our company ending December 31 of that year.

When we refer to our “privatization” or our being “privatized” in this annual report, we mean our status as a non-state-owned entity after the government reduced its ownership of our outstanding common shares, including our common shares owned by entities majority-owned by the government, to less than 50%. We were privatized in August 2005.

We publish our consolidated financial statements in New Taiwan dollars, the lawful currency of the Republic of China. In this annual report, “NT$” and “NT dollars” mean New Taiwan dollars, “$”, “US$” and “U.S. dollars” mean United States dollars.

FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT MAY NOT BE REALIZED

This annual report contains forward-looking statements, including statements regarding:

 

    our business and operating strategies;

 

    our network expansion plans;

 

    our business, operations and prospects;

 

    our financial condition and results of operations;

 

    our dividend policy;

 

    the telecommunications industry regulatory environment in Taiwan; and

 

    future developments in the telecommunications industry in Taiwan.

 

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These forward-looking statements are generally indicated by the use of forward-looking terminology such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “aim,” “seek,” “project,” “may,” “will” or other similar words that express an indication of actions or results of actions that may or are expected to occur in the future. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions, many of which are beyond our control. The forward looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. You should not place undue reliance on these statements, which apply only as of the date of this annual report. These forward-looking statements are based on our own information and on information from other sources we believe to be reliable. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences include, but are not limited to, those discussed under “Item 3. Key Information—D. Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements. The forward looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

We were privatized as a result of a secondary ADS offering and concurrent domestic auction of our common shares on August 12, 2005. The privatization has enabled us to develop our business and respond to changing market conditions more rapidly and efficiently.

A. Selected Financial Data

The FSC in the Republic of China, or ROC, supervises the financial and business matters of publicly-held companies, and we are required to comply with relevant regulations promulgated by the FSC. Prior to January 1, 2013, we prepared our consolidated financial statements, in accordance with ROC GAAP for purposes of our filings with the Taiwan Stock Exchange, or TWSE, with reconciliation of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP for certain filings with the U.S. Securities and Exchange Commission, or the SEC. Starting from January 1, 2013, we have prepared our financial statements under Taiwan IFRSs pursuant to the requirements of the “Framework for Adoption of International Financial Reporting Standards by Companies in the ROC” promulgated by the FSC on May 14, 2009. While we have adopted Taiwan IFRSs for reporting in the ROC our annual consolidated financial statements and interim quarterly unaudited consolidated financial statements since January 1, 2013, we have adopted International

 

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Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRSs, which differs in certain material respects from Taiwan IFRSs, for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter and our interim quarterly unaudited consolidated financial statements provided on Form 6-K beginning with the three months ended March 31, 2013. Therefore, we no longer prepare any reconciliation of our consolidated financial statements with U.S. GAAP.

The selected consolidated statements of comprehensive income data and consolidated cash flows data for the years ended December 31, 2013, 2014 and 2015, and the selected consolidated balance sheets data as of December 31, 2014 and 2015 set forth below are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the related notes. The selected consolidated statements of comprehensive income data and consolidated cash flows data for the year ended December 31, 2012, and the selected consolidated balance sheet data as of December 31, 2012 and 2013 set forth below are derived from our audited consolidated financial statements, which are not included this annual report. The consolidated financial statements have been prepared and presented in accordance with IFRSs. In addition, financial data as of and for the year ended December 31, 2011 derived from our consolidated financial statements prepared in accordance with ROC GAAP are not set forth below.

 

     Year Ended December 31  
     2012      2013      2014      2015  
       NT$          NT$          NT$          NT$          US$    
     (in billions, except for percentages and
per share and per ADS data)
 

Consolidated Statements of Comprehensive Income Data:

              

Revenues

     221.4         228.0         226.6         231.8         7.1   

Operating costs

     (141.5      (147.3      (148.4      (148.1      (4.5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     79.9         80.7         78.2         83.7         2.6   

Operating expenses

     (29.9      (33.1      (34.0      (33.2      (1.0

Other income and expenses

     (1.6      0.1         0.6         (0.1      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     48.4         47.7         44.8         50.4         1.6   

Non-operating income and expenses(1)

     1.6         1.4         1.8         1.6         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax

     50.0         49.1         46.6         52.0         1.6   

Income tax expense

     (7.4      (6.5      (9.0      (9.1      (0.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated net income

     42.6         42.6         37.6         42.9         1.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Attributable to:

              

Stockholders of the parent

     41.5         41.5         37.0         42.1         1.3   

Noncontrolling interests

     1.1         1.1         0.6         0.8         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     42.6         42.6         37.6         42.9         1.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

              

Basic

     5.35         5.35         4.77         5.42         0.17   

Diluted

     5.33         5.34         4.76         5.41         0.17   

Earnings per ADS equivalent:

              

Basic

     53.49         53.49         47.66         54.19         1.65   

Diluted

     53.34         53.40         47.58         54.06         1.65   

 

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     As of December 31  
     2012      2013      2014      2015  
     NT$      NT$      NT$      NT$      US$  
     (in billions, except for percentages and
per share and per ADS data)
 

Consolidated Balance Sheets Data:

        

Working capital

     40.2         (0.3      6.9         13.3         0.4   

Long-term investments

     19.7         15.3         13.1         10.5         0.3   

Property, plant and equipment

     297.3         302.7         302.7         296.4         9.0   

Investment properties

     7.8         8.0         7.6         7.9         0.2   

Intangible assets

     5.8         44.4         42.8         50.4         1.5   

Total assets

     440.0         441.0         446.5         452.8         13.8   

Short-term loans

     0.1         0.3         0.6         0.1         —     

Current portion of long-term loans

     —           0.3         —           —           —     

Long-term loans(2)

     2.1         1.4         1.9         1.7         0.1   

Customers’ deposits

     4.9         4.8         4.8         4.7         0.1   

Net defined benefit liabilities

     4.6         5.5         6.5         7.1         0.2   

Deferred revenue

     3.8         3.7         3.4         3.6         0.1   

Total liabilities

     76.6         77.8         80.8         83.4         2.5   

Capital stock

     77.6         77.6         77.6         77.6         2.4   

Equity attributable to stockholders of the parent

     359.1         358.3         360.8         364.3         11.1   

Noncontrolling interests

     4.3         4.9         4.9         5.1         0.2   

 

     Year Ended December 31  
     2012     2013     2014     2015  
     NT$     NT$     NT$     NT$     US$  
    

(in billions, except for percentages

and per share)

 

Consolidated Cash Flows Data:

          

Net cash provided by operating activities

     65.6        75.3        71.4        76.3        2.3   

Net cash used in investing activities

     (18.6     (49.1     (27.3     (30.4     (0.9

Net cash used in financing activities

     (42.5     (42.5     (35.1     (39.2     (1.2

Net increase (decrease) in cash and cash equivalents

     4.5        (16.3     9.0        6.7        0.2   

Other Financial Data:

          

Gross margin(3)

     36     35     35     36     36

Operating margin(4)

     22     21     20     22     22

Net margin(5)

     19     18     16     18     18

Capital expenditures

     33.3        36.4        32.6        25.1        0.8   

Depreciation and amortization

     32.2        32.2        34.1        33.4        1.0   

Cash dividends declared per share

     4.63 (6)      2.39 (7)      4.86        5.49 (8)      0.17 (8) 

Stock dividends declared per share

     —          —          —          —          —     

 

(1) Includes interest income of NT$742 million, NT$563 million, NT$288 million and NT$306 million (US$9.3 million) for the years ended December 31, 2012, 2013, 2014 and 2015, respectively, and interest expense of NT$22 million, NT$36 million, NT$46 million and NT$33 million (US$1.0 million) for the years ended December 31, 2012, 2013, 2014 and 2015, respectively.
(2) Excludes current portion of long-term loans.
(3) Represents gross profit divided by revenues.
(4) Represents income from operations divided by revenues.
(5) Represents net income attributed to stockholders of the parent divided by revenues.

 

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(6) In addition to the cash dividends from unappropriated earnings disclosed in table above, we also made cash distributions of NT$0.72 per share, which amounted to an aggregate of NT$5.6 billion, from additional paid-in capital.
(7) In addition to the cash dividends from unappropriated earnings disclosed in the table above, we also made cash distributions of NT$2.14 per share, which amounted to an aggregate of NT$16.6 billion, from additional paid-in capital. See “Item 5. Operating and Financial Review and Prospects—Overview—Effect of adopting Taiwan IFRSs on our dividends and employee bonuses.”
(8) Dividends for 2015, which are calculated based on Taiwan IFRSs, were approved by the board of directors in March 2016 and are expected to be declared at our annual general stockholders’ meeting scheduled on June 24, 2016.

Currency Translations and Exchange Rates

For the convenience of readers, NT dollar amounts used in this annual report for, and as of, the year ended December 31, 2015 have been translated into U.S. dollar amounts using US$1.00=NT$32.79, set forth in the statistical release of the Federal Reserve Board on December 31, 2015. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount. We make no representation that any New Taiwan dollar amounts or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all. On April 15, 2016, the exchange rate was NT$32.32 to US$1.00.

The following table sets forth, for each of the periods indicated, the low, average, high and period-end exchange rates of the NT dollar, expressed in NT dollar per U.S. dollar. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

 

Year Ended December 31

   Average(1)      High      Low      At Period
End
 

2011

     29.42         30.67         28.50         30.27   

2012

     29.56         30.27         28.96         29.05   

2013

     29.73         30.20         29.93         29.83   

2014

     30.38         31.80         29.85         31.60   

2015

     31.80         33.17         30.37         32.79   

October

     32.44         32.81         31.92         32.46   

November

     32.61         32.87         32.43         32.53   

December

     32.79         33.01         32.53         32.79   

2016 (through April 15)

     32.79         33.74         32.16         32.32   

January

     33.43         33.74         33.14         33.43   

February

     33.24         33.51         32.95         33.22   

March

     32.59         33.09         32.16         32.18   

April (through April 15)

     32.36         32.44         32.26         32.32   

 

Source: Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System.

 

(1) Annual averages are calculated using the average of exchange rates on the last day of each month during the period. Monthly averages are calculated using the average of the daily rates during the relevant period.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

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D. Risk Factors

Our business and operations are subject to various risks, many of which are beyond our control. If any of the risks described below actually occurs, our business, financial condition or results of operations could be seriously harmed.

Risks Relating to Our Company and the Taiwan Telecommunications Industry

Extensive regulation of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.

As a telecommunications service provider in Taiwan, we are subject to extensive regulation. See “Item 4. Information on the Company—B. Business Overview—Regulation” for a discussion of the regulatory environment applicable to us. Any changes in the regulatory environment applicable to us may adversely affect our business, financial condition and results of operations.

For example, the NCC has been focused on promulgating rules related to digital convergence. Since December 2013, the NCC continued to solicit comments from the public on eleven topics relating to the local loop, the prevention of monopolization of broadcasting media, the regulations governing political party, government and army’s investments in broadcasting industry, the identification of dominant operators and asymmetric regulation for dominant operators, the principle of content management, the principle of hierarchical regulation, the infrastructure of telecommunications network, the structure of amendment to regulations governing digital convergence, and spectrum auction and management. On October 14, 2015, the NCC passed a “comprehensive draft legislative framework on converging digital telecommunication transmissions” proposing five pieces of legislation – the Telecommunication Business Act, Regulations Governing the Service of Cable Multi-Channel Platform, the Radio and Television Enterprises and Channel Enterprises Administration Act, Regulations Governing Telecommunication Infrastructures and Resources, and the Electronic Telecommunication Act – to constitute a legal framework for converging digital telecommunication transmissions. Such proposal was submitted to the Executive Yuan on December 31, 2015, and the proposal is still being circulated among various ministries and reviewed by the Executive Yuan as of the date of this annual report. The proposed legislation focuses on introducing the concept of layered regulation, lowering barriers to entering the market, removing unnecessary restrictions and on imposing special obligations on dominant operators. The new regulations may impose more stringent measures on us as a dominant operator and benefit our competitors and potential entrants to the market, which could have a material adverse effect on our business prospects and our results of operations.

Proposed amendments to the Radio and Television Act, the Cable Radio and Television Act and the Satellite Broadcasting Act were passed by the Legislative Yuan on December 18, 2015 and were declared effective by the President on January 6, 2016. As these amendments focus primarily on lessening restrictions on cable broadcasting companies’ business operating location and accelerating digital construction in the cable broadcasting industry, we believe that our broadband internet and MOD businesses may be faced with more vigorous competition in the future. As the newly amended Radio and Television Act (a) prohibits system operators from forcing content providers to offer differential treatment to other platforms in an inappropriate way, and (b) provides a legal basis for licensed shopping channels to be listed on the MOD platform, the amendment is helpful for our MOD to obtain more comprehensive program content. Since lawmakers have not yet removed restrictions on governmental and political parties’ investments in the broadcasting industries, our MOD business remains subject to such restrictions.

We have been designated by the government as a dominant provider of fixed communications and 2G and 3G mobile services within the meaning of applicable telecommunications regulations, and as a result, we are subject to special additional requirements imposed by the NCC. For example, the regulation governing the setting and changing of tariffs allows non-dominant telecommunications service providers greater freedom to set

 

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and change tariffs within the range set by the government. If we are unable to respond effectively to tariff changes by our competitors, our competitiveness, market position and profitability will be materially and adversely affected.

According to the Regulations for Administration on Fixed Network Telecommunications Business, the Regulations for Administration of Mobile Communications Business, the Regulations for Administration of the Third Generation Mobile Communications Business, and the Regulations for Administration of Mobile Broadband Business, we are required to submit a report to the NCC within 20 days after our shareholders approve the reduction of our capital, entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations, the transfer of the whole or substantial part of our business or assets; and taking over of the whole of the business or assets of any other company which would have significant impact on our operations. Any such regulations may adversely affect our business, financial condition and results of operations.

The regulatory framework within which we operate may limit our flexibility to respond to market conditions, competition or changes in our cost structure. In particular, future decreases in tariff rates could immediately and substantially decrease our revenues. In particular, as a Type I service provider under the Republic of China Telecommunications Act, or Telecommunications Act, we are constrained in our ability to raise prices. For example, the NCC adopted the first three-year tariff reduction plan from April 2007 to March 2010 and a second three-year tariff reduction plan from April 2010 to March 2013, resulting in a number of price reductions in the tariff structures relating to our domestic fixed communications and mobile communications services. On February 7, 2013, the NCC announced a new plan for tariff reductions in wholesale tariffs for IP peering and domestic leased line services, and in monthly fees for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB) over a period of four years starting on April 1, 2013. While mobile tariffs were not regulated in the most recent tariff reduction plan, the revised Regulations Governing Network Interconnection among Telecommunications Enterprises mandated decreases in the mobile interconnection fees over a period of four years starting on January 5, 2013. See “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.

If we fail to comply with the regulations of the ROC Fair Trade Act, we may be investigated and fined.

As a provider of telecommunication products and services, our business operations are subject to the regulations of the ROC Fair Trade Act, or the FTA, which is administered and enforced by the ROC Fair Trade Commission, or the FTC. The FTA requires, among other things, that the marketing and promotional materials of a business to be true and not misleading. The FTA also prohibits a business from participating or engaging in a cartel or other anti-competitive conduct. The FTC has the authority under the FTA to investigate and, where appropriate, impose fines and penalties on a business that violates any regulations promulgated by the FTA. The consequences of any such violations could have a material adverse effect on our business and results of operations. See “Item 4. Information on the Company—B. Business Overview—Regulation” for a discussion of the FTA applicable to us. In March 2015, the FTC found us liable for providing false and misleading data in advertisement comparing our services against our competitors on our 100 million bits per second, or Mbps, fiber broadband plus TV programs service in the PingTung area. The FTC consequently ordered us to pay a fine of NT$0.8 million, which we paid in March 2015. We have been investigated and penalized by the FTC in the past and may continue to be investigated or penalized by the FTC in the future if we fail to comply with the relevant regulations. As the FTA provides the FTC broad discretion to interpret anti-competition actions and enforce the relevant clauses under the FTA, we are unable to predict whether the FTC would initiate investigation on any of our daily business activities or find us liable for violating the FTA in the future. The investigations of and penalties imposed by the FTC could interrupt our provision of products or services and have a negative impact on our reputation, business operations and results of operations.

 

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If we are unable to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely affected.

We operate our businesses with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial condition and results of operations, as well as our prospects, will suffer. For example, our 3G mobile services license is valid until December 31, 2018. On April 30, 2014, we obtained the mobile broadband services license adhering to the principle of technological neutrality for our 4G mobile broadband services, which is valid until the end of 2030. On March 23, 2016, we obtained the mobile broadband services license for 2500MHz and 2600MHz frequency bands, which is valid until the end of 2033. If we are unable to successfully acquire and maintain the rights to use the licenses or frequency spectrums that we need for our future business operations, our business prospects and future results of operations may be materially and adversely affected.

Increasing market competition may adversely affect our growth and profitability by causing us to lose customers, charge lower tariffs or spend more on marketing.

As of the date of this annual report, there are five mobile network operators in Taiwan providing 4G mobile broadband services. Each mobile network operator, including us, has been offering aggressive promotional programs to attract consumers, such as unlimited data plans, when many mobile network operators around the world have eliminated unlimited data plans. We cannot assure you that we will be able to raise our revenues from 4G mobile broadband services in light of the intense market competition, which could have a material adverse effect on our business prospects and our future results of operations.

We also face increasing fixed broadband competition from cable operators. Cable operators have been using low-priced internet access packages to attract new customers in specific areas and buildings in Taiwan. They have also been upgrading their networks to DOCSIS 3.0 in order to provide higher speed internet access. DOCSIS refers to Data Over Cable Service Interface Specification, which is an international telecommunications standard that permits the addition of high-speed data transfer to an existing cable TV system. The government has mandated the 100% digitization of cable television networks by December 31, 2016, which would increase the availability of high-speed internet services from cable operators. In addition, as the mobile data access speeds have increased with newer technologies, such as 4G LTE, some customers have replaced fixed broadband services with high speed mobile broadband services. To counter these developments, we are migrating more of our ADSL customers to FTTx services and offering even higher speed fiber to the home, or FTTH access. Furthermore, the NCC relaxed the zoning restrictions on service areas for cable operators on July 27, 2012, while cable operators remain subject to the restriction that the market share of any single cable operator cannot exceed 33%. This change will allow cable operators to provide digital cable services throughout Taiwan, including high definition cable TV with more channels as well as high speed cable modem services. As a result, we could face increased competition for our broadband access services and MOD IPTV services. If we are unable to compete successfully with the cable operators for broadband access services and MOD businesses, our results of operations could be impacted.

In addition, our over the top, or OTT, business may not able to compete with video streaming providers such as Netflix, Inc., which invests extensively in contents and productions of original films and TV series. Our OTT customers might be attracted by its massive and exclusive titles, and our OTT business growth might slow down and be limited.

Many of our competitors are in alliances with leading international telecommunications service providers and have access to financial and other resources or technologies that may not be available to us. Moreover, if the government continues to liberalize the telecommunications market, such as through the issuance of new licenses or establishment of additional networks, our market position and competitiveness could be materially and adversely affected. We cannot guarantee that our measures to address competition will be effective, and therefore our business, financial condition and results of operations may be adversely affected by our competitors.

 

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Rates of customer growth have declined in our fixed broadband and mobile businesses and may decline further, which may bring about further decreases in tariff rates and necessitate increases in our selling and promotional expenses. Any of these developments could adversely affect our business, financial condition and results of operations.

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural disasters.

Taiwan is susceptible to earthquakes and typhoons. However, we do not carry insurance to cover damage caused by earthquakes, typhoons or other natural disasters or any resulting business interruption. Our services are currently carried through our fixed and mobile communications networks, as well as through our transmission networks consisting of optical fiber cable, microwave, submarine cable and satellite transmission links, which could be vulnerable to damage or interruptions in operations due to natural disasters. For example, in 2015, we recorded losses on property, plant and equipment arising from natural disasters such as earthquakes and typhoons in the amount of approximately NT$12.3 million (US$0.4 million). The occurrence of natural disasters could impact our ability to deliver services and have a negative effect on our results of operations. Furthermore, we might also be liable for losses claimed from our customers that were incurred from our failure to deliver our services. These potential liabilities could also have a material adverse effect on our results of operations.

We are subject to litigation or other legal proceedings that could expose us to substantial liabilities.

We are from time to time involved in various litigation, arbitration or administrative proceedings in the ordinary course of our business. Any such claims, whether with or without merit, asserted or threatened, could be time-consuming and expensive to defend and could divert our management’s attention and resources. See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings”. We cannot predict the outcome of these proceedings, and we cannot assure you that if a judgment is rendered against us in any or all of these proceedings, our financial condition and results of operations would not be materially and adversely affected.

We depend on select personnel and could be affected by the loss of their services.

We depend on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. In particular, we are not insured against the loss of any of our personnel. We may not be able to retain our present personnel or attract additional qualified personnel as and when needed. Moreover, we may be required to increase substantially the number of these employees in connection with any expansion, and there is intense competition for experienced personnel in the Taiwan telecommunications industry. The major three telecom operators in Taiwan, including us, are expanding the information and communication technology, or ICT, business and may increase the number of their employees as part of this expansion. In addition to telecom operators, some computer design companies and manufacturers, such as ASUSTek Computer Inc. and Quanta Computer Incorporated, are also expanding their business into this area and have been recruiting information technology related employees as well. We cannot assure you that we will be able to successfully attract and retain new information technology related employees. In addition, we may need to increase employee compensation levels in order to attract and retain personnel. We cannot assure you that the loss of the services of any of these personnel would not disrupt our business and operations and materially and adversely affect the quality of our services and harm our reputation.

We may not realize the benefits we expect from our investments, and this may materially and adversely affect our business, financial condition, results of operations and prospects.

We have made significant capital investments in our network infrastructure and information technology systems to provide the services we offer. In 2015, we made capital expenditures in our domestic fixed

 

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communications of NT$10.2 billion (US$310.9 million), our mobile communications business of NT$8.6 billion (US$262.2 million), our internet business of NT$4.8 billion (US$146.2 million), our international fixed communications business of NT$1.0 billion (US$29.5 million) and our other businesses of NT$0.5 billion (US$16.1 million), respectively. In order to continue to develop our business and offer new and more sophisticated services, we intend to continue to invest in these areas as well as new technologies. The launch of new and commercially viable products and services is important to the success of our business. We expect to continue making substantial capital expenditures to further develop our range of services and products.

Commercial acceptance by consumers of the new and more sophisticated services we offer may not occur at the rate or level expected, and we may not be able to successfully adapt these services to effectively and economically meet our customers’ demand, thus impairing the expected return from our investments.

We cannot assure you that services enabled by the new technologies we are implementing, such as Internet of Things, or IoT, software-defined network, or SDN, LTE Wi-Fi aggregation, or LWA, license assisted access, or LAA, voice over LTE, or VoLTE, and Wi-Fi Calling technology, will be accepted by the public to the extent required to generate an acceptable rate of return. In addition, we could face the risk of unforeseen complications in the deployment of these new services and technologies, and we cannot assure you that we will not exceed our estimate of the necessary capital expenditure to offer such services. New services and technologies may not be developed and/or deployed according to expected schedules or may not achieve commercial acceptance or be cost effective.

The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent that we are required under applicable accounting standards to recognize a charge for impairment of assets. Any such charge could materially and adversely affect our financial condition and results of operations. We recognized impairment losses for investment properties, equipment and intangible assets in the past. In 2015, we concluded that the recoverable amount representing the fair value less costs to sell some land and buildings was higher than the carrying amount. Therefore, we recognized a reversal of impairment loss of NT$0.1 billion (US$4.3 million) and the amount was recognized only to the extent of impairment losses that had been recognized in prior years. In 2015, we also determined that parts of our telecommunication equipment were impaired and recognized an impairment loss of NT$0.1 billion (US$4.2 million).

We cannot assure you that we will be able to continue to maintain control of and consolidate the results of operations of our minority-owned subsidiary. For example, we consolidate the results of operations of our subsidiary, Senao International Co., Ltd., or Senao, because we have secured four out of seven seats on the board of directors of Senao through the support of large beneficial shareholders of Senao. Please refer to Note 3 and Note 15 of our consolidated financial statements included elsewhere in this annual report for details of the relationship between Senao and its parent company. We cannot assure you that we will be able to continue maintaining control over the board of directors of Senao. If we lose control of our minority-owned subsidiary, we will no longer be able to consolidate the results of operations of such subsidiary, which could adversely affect our consolidated results of operations and ability to meet the operating results guidance that we have projected.

We may also from time to time make equity investments in companies, but we cannot assure you of their profitability. We cannot assure you that losses related to our equity investments will not have a material adverse effect on our financial condition or results of operations. In 2015, we evaluated and concluded that certain investments were impaired, and as a result we recognized an impairment loss of NT$107.2 million (US$3.3 million) for available-for-sale financial assets and NT$8.2 million (US$0.3 million) for investment in associates accounted for using the equity method due to the decline in fair value owing to adverse changes in industry conditions and operating performance that were below expectations. We may be required to record additional impairment charges in future periods, which may have a material adverse effect on our financial condition and future results of operations.

 

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Changes in technology may render our current technologies obsolete or require us to obtain licenses for introducing new services or make substantial capital investments, financing for which may not be available to us on favorable commercial terms or at all.

The Taiwan telecommunications industry has been characterized by rapid increases in the diversity and sophistication of the technologies and services offered. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services in order to respond to competitive industry conditions and customer requirements. Developments of new technologies have rendered some less advanced technologies unpopular or obsolete. If we fail to develop, or obtain timely access to, new technologies and equipment, or if we fail to obtain the necessary licenses to provide services using these new technologies, we may lose our customers and market share and become less profitable.

In addition, the cost of implementing new technologies, upgrading our networks or expanding capacity could be significant. In particular, we have made and will continue to make substantial capital expenditures in the near future in order to effectively respond to technological changes, such as the continued expansion of our fiber optic networks and 4G mobile broadband networks. To meet the increasingly robust high-bandwidth requirements of digital convergence services, we continue to expand construction of fiber optic networks, including passive optical networks, or PONs, and optical distribution networks, or ODNs. With respect to 4G mobile broadband networks, in December 2014, we expanded the network coverage by refarming the 900MHz frequency band from 2G to 4G and began implementing the carrier aggregation, or CA, technology of LTE-Advanced, or LTE-A, in the 900MHz and 1800MHz frequency bands to provide higher data transmission rates. In 2015, we made several procurements with Nokia Solutions and Networks Oy and Ericsson Taiwan Ltd., respectively, to further expand the 3G and 4G mobile network systems. Also, we are deploying 4G base stations with 2500MHz and 2600MHz frequency bands of mobile broadband services and to enhance our 4G mobile broadband capacity. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain additional financing on favorable commercial terms will depend on a number of factors. These factors include our financial condition, results of operations, cash flows and the prevailing market conditions in the domestic and international telecommunications industry, the cost of financing and conditions in the financial markets, and the issuance of relevant government and other regulatory approvals. Any inability to obtain the funding for our capital expenditures on commercially acceptable terms could jeopardize our expansion plans and materially and adversely affect our business prospects and future results of operations.

If new technologies adopted by us do not perform as expected, or if we are unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth and profitability will decline.

We are constantly evaluating new growth opportunities in the broader telecommunications industry. Some of these opportunities involve new services for which there are no proven markets, and may not develop as expected. Our ability to deploy and deliver these services will depend, in many instances, on new but unproven technologies. These new technologies may not perform as expected or generate an acceptable rate of return. In addition, we may not be able to successfully develop new technologies to effectively and economically deliver these services, or be able to compete successfully in the delivery of telecommunications services based on new technologies. Furthermore, the success of our IoT services is substantially dependent on the availability of applications and devices that are being developed by third-party developers, and on whether we will be able to achieve a sustainable business model for consumer segments of the market. These applications or devices may not be sufficiently developed to support the deployment of our mobile data services. If we are unable to deliver commercially viable services based on the new technologies that we adopt, our financial condition and results of operations may be materially and adversely affected.

As an internet service provider, we may not be able to protect our customers and their information from cyber attacks, nor protect our services from disruptions due to cyber security breaches.

As an internet service provider, our system is susceptible to cyber security risks, including hijack attacks, phishing attacks, hacker’s intrusions to steal customer’s information and distributed denial-of-service (DDoS)

 

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attacks. Our online services such as e-bills and multiple payment options through the internet are also vulnerable to cyber attacks. These attacks may disrupt our services and cause leakage of our customers’ personal information, which may result in significant damage and material adverse effect to our customers and our operations. We cannot assure you that our data protection measures are sufficient to prevent any data leakage or disruption of our service due to cyber attacks. We may suffer negative consequences, such as remedial costs, increased cyber security protection costs, lost revenues, litigation and reputational damage due to cyber attacks.

Our largest stockholder may take actions that conflict with our public stockholders’ best interests.

As of December 31, 2015, 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.

Actual or perceived health risks related to mobile handsets and base stations could lead to decreased mobile service usage and difficulties in increasing network coverage and could expose us to potential liability.

According to some published reports, the electromagnetic signals from mobile handsets and cellular base stations may pose health risks or interfere with the operation of electronic equipment. Although the findings of those reports are disputed, actual or perceived risks of using mobile communications devices or of cellular base stations could have a material adverse effect on mobile service providers, including us. For example, our customer base could be reduced, our customers may reduce their usage of our mobile services, we could encounter difficulties in obtaining sites for additional cellular base stations required to expand our network coverage or we may be requested to reduce the number of existing cellular base stations. As a result, our mobile services business may generate less revenue and our financial condition and results of operations may be materially and adversely affected. In addition, we could be exposed to potential liability for any health problems caused by mobile handsets and base stations.

Investor confidence in us may be adversely impacted if we or our independent registered public accountants are unable to attest to or express an unqualified opinion on the effectiveness of our internal control over financial reporting.

We are subject to the reporting requirements of the SEC. The SEC, as directed by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, adopted rules requiring U.S. public companies to include a report of management on our internal control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of our internal control over financial reporting. The effectiveness of our internal control over financial reporting has been audited by Deloitte & Touche, an independent registered public accounting firm, which has also audited our consolidated financial statements for the year ended December 31, 2015. Deloitte & Touche has issued an attestation report on the effectiveness of our internal control over financial reporting in

 

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accordance with the standards of the Public Company Accounting Oversight Board (United States). See “Item 15. Controls and Procedures—Attestation Report of the Registered Public Accounting Firm”.

While the management report included in this annual report concluded that our internal control over financial reporting was effective, we cannot assure you that our management will be able to conclude that our internal control over financial reporting is effective in future years. If in future years we fail to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor confidence in the reliability of our consolidated financial statements, which in turn could negatively impact the trading price of our ADSs, and could result in lawsuits being filed against us by our stockholders or otherwise harm our reputation.

If we fail to maintain a good relationship with our labor union, work stoppages or labor unrest could occur and the quality of our services as well as our reputation could suffer.

In accordance with the articles of association of Chunghwa Telecom Workers’ Union, besides the chief manager of each department, most of our employees are members of our principal labor union, the Chunghwa Telecom Workers’ Union. Since our incorporation in 1996, we have experienced disputes with our labor union on such issues as employee benefits and retirement benefits in connection with our privatization as well as the right to protest. Despite having taken measures to improve relations, increase cooperation and ensure mutual benefit with our labor union, such as increasing channels of communications by holding periodic labor resource review meetings and guaranteeing our labor union a seat on our board of directors, we cannot assure you that we will be able to maintain a good relationship with our labor union. Any deterioration in our relationship with our labor union could result in work stoppages, strikes or threats to take such an action, which could disrupt our business and operations, materially and adversely affect the quality of our services and harm our reputation.

Any economic downturn or decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects.

We conduct most of our operations and generate most of our revenues in Taiwan. As a result, any decline in the Taiwan economy or a decline in the growth of the population in Taiwan may materially and adversely affect our financial condition, results of operations and prospects. In particular, Taiwan’s economy is highly dependent on the technology industry, and any downturn in the global technology industry may have a material adverse effect on Taiwan’s economy, which in turn, could adversely affect the demand for our products and services. There have also been concerns over the armed conflicts and civil unrest in the Middle East, Africa and Ukraine, which has resulted in higher volatility on oil prices and stock markets, and the economic slowdown in Mainland China, which could have a material adverse effect on economies around the world.

As our business is dependent on economic growth, any uncertainty or further deterioration in economic conditions could have a material adverse effect on our financial condition and results of operations. We cannot assure you that economic conditions in Taiwan will continue to improve in the future or that our business and operations will not be materially and adversely affected by deterioration in the Taiwan economy.

We face substantial political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between the ROC and the People’s Republic of China, which could adversely affect our financial condition and results of operations.

Our principal executive offices and substantially all of our assets are located in Taiwan, and substantially all of our revenues are derived from our operations in Taiwan. Accordingly, our business, financial condition and results of operations and the market price of our common shares and the ADSs may be affected by changes in ROC governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan and the Chinese mainland have been separately governed. The People’s Republic of

 

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China, or PRC, claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established between the ROC and the PRC, such as the engagement of the Economic Cooperation Framework Agreement, or ECFA, in 2010, relations may become strained again. In June 2013, the ROC government and the PRC government entered into the Cross-Strait Agreement on Trade in Services pursuant to the ECFA. According to this agreement, both parties agreed to certain concessions on the telecommunication industries. The Executive Yuan has submitted the Cross-Strait Agreement on Trade in Services to the Legislation Yuan of Taiwan for ratification. As of March 31, 2016, the Cross-Strait Agreement on Trade in Services has not yet been ratified by the Legislation Yuan. If the Cross-Strait Agreement on Trade in Services is not ratified by the Legislation Yuan, our business operations in the PRC and our results of operations may be adversely affected.

In addition, the PRC government has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the ROC and the PRC have on occasion depressed the market prices of the securities of companies in the ROC. Relations between the ROC and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the ROC and PRC require companies involved in cross-strait business operations to carefully monitor their actions and manage their relationships with both ROC and PRC governments. In the past, companies in the ROC, including us, have received minor sanctions such as travel restrictions or minor monetary fines by the ROC and/or PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the ROC and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.

Any future outbreak of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

Any future outbreak of contagious diseases, such as avian influenza, dengue fever or Ebola virus, may disrupt our ability to adequately staff our business and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity in affected regions, including Taiwan, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.

Stockholders may have more difficulty protecting their interests under the laws of the ROC than they would under the laws of the United States.

Our corporate affairs are governed by our articles of incorporation, the Telecommunications Act, 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 competition, and our business 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 United States. 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 in 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.

Our actual financial results may differ materially from our published guidance.

Prior to 2013, we used to voluntarily publish our operating results guidance on an annual basis in accordance with ROC GAAP. Beginning in 2013, we continued to voluntarily publish our operating results

 

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guidance on an annual basis in accordance with Taiwan IFRSs. We may from time to time update our operating results guidance after evaluating the effects of any changes to the estimates and assumptions that we used to calculate our projections of our operating results. Our projections are based on a number of estimates and assumptions that are inherently subject to significant uncertainties and contingencies, including the risk factors described in this annual report. In particular, our projections are forward-looking statements that are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time.

Our results of operations and financial condition upon the adoption of Taiwan IFRSs may differ materially from our reported results of operations and financial condition under IFRSs.

Prior to January 1, 2013, we prepared our consolidated financial statements in accordance with ROC GAAP for purposes of our filings with the TWSE, with reconciliation of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP for certain filings with the SEC. Starting from January 1, 2013, we have prepared our financial statements under Taiwan IFRSs. While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. We no longer prepare any reconciliation of our consolidated financial statements with U.S. GAAP. For more details, see “Item 3. Key Information—A. Selected Financial Data” for the description about the adoption of Taiwan IFRSs.

Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC. Furthermore, the dividends for 2015 that are expected to be declared at our 2016 annual general stockholders’ meeting are calculated based on Taiwan IFRSs. It is difficult for us to evaluate the precise impact of the adoption of Taiwan IFRSs and IFRSs on our financial statements, because the FSC may issue new rules governing the adoption of Taiwan IFRSs and as other laws and regulations may be amended with the adoption of Taiwan IFRSs.

Risks Relating to Ownership of Our ADSs and Common Shares

The 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.

The market value of your investment may fluctuate due to the volatility of, and government intervention in, the Taiwan securities market.

Our common shares are traded on the TWSE, which has a smaller market capitalization and is more volatile than the securities markets in the United States and many European countries. The market value of our ADSs may fluctuate in response to the fluctuation of the trading price of our common shares on the TWSE. The TWSE has experienced substantial fluctuations in the prices and trading volumes of listed securities, and there are currently limits on the range of daily price movements. During 2015, the TWSE Index peaked at 9,973.12 on April 27, 2015, and reached a low of 7,410.34 on August 24, 2015. On April 20, 2016, the TWSE Index closed at 8514.48. The TWSE has experienced certain problems, including market manipulation, insider trading and payment defaults. The recurrence of these or similar problems could have a material adverse effect on the market price and liquidity of the securities of Taiwan companies, including our ADSs and common shares, in both the domestic and the international markets.

In response to declines and volatility in the securities markets in Taiwan, the government of the ROC formed the National Financial Stabilization Fund to support these markets through open market purchases of

 

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shares in Taiwan companies from time to time. The details of the transactions of the National Financial Stabilization Fund have not been made public. In addition, the government’s Labor Insurance Fund and other funds associated with the government have in the past purchased, and may from time to time purchase, shares of Taiwan companies listed on the TWSE or other markets. As a result of these activities, the market price of common shares of Taiwan companies may have been and may currently be higher than the prices that would otherwise prevail in the open market. Market intervention by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause sudden movements in the market prices of the securities of Taiwan companies, which may affect the market price and liquidity of our common shares and ADSs.

We may be sanctioned or lose our licenses for violations of limits on foreign ownership of our common shares, and these limits may materially and adversely affect our ability to obtain financing.

The laws of the ROC limit foreign ownership of our common shares. Prior to March 1, 2006, the MOTC, as the competent authority under the Telecommunications Act, had the power to prescribe the limits on foreign ownership of our common shares. After the formation of the NCC on March 1, 2006, the NCC replaced the MOTC as the competent authority under the Telecommunications Act pursuant to the National Communications Commission Organization Act, or the Organization Act. The NCC and the MOTC reached an agreement on foreign ownership of Chunghwa Telecom. An announcement issued by the MOTC on December 28, 2007 stipulated that direct holdings by foreign investors in Chunghwa Telecom cannot exceed 49% of our outstanding share capital and the total direct and indirect holdings by foreign investors cannot exceed 55% of our outstanding share capital. As of April 20, 2016, foreign direct holdings of our outstanding share capital is at 24.34%. If we fail to comply with the applicable foreign ownership limitations, our licenses to operate some of our businesses could be revoked. Moreover, we cannot predict the manner in which the NCC will exercise its authority over us, or whether 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 because we have no ability to stop transfers among stockholders, or force particular stockholders to sell their shares, we may be subject to monetary fine or lose our licenses through 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.

Restrictions on the ability to deposit our common shares into our ADS program may adversely affect the liquidity and price of the ADSs.

The ability to deposit shares into our ADS program is restricted by ROC law, under which no person or entity, including you and us, may deposit our common shares into our ADS program unless the Securities and Futures Bureau has not objected within a prescribed period following the filing with it of an application to do so, except for the deposit of the common shares into our ADS program and for the issuance of additional ADSs in connection with:

 

    distribution of share dividends or free distribution of our common shares;

 

    exercise of preemptive rights of ADS holders applicable to the common shares evidenced by our ADSs in the event of capital increases for cash; or

 

   

purchases of our common shares in the domestic market in Taiwan by the investor directly or through the depositary and delivery of such shares or delivery of our common shares held by such investors to the custodian for deposit into our ADS program, subject to the following conditions: (a) the depositary

 

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may accept deposit of those shares and issue the corresponding number of ADSs with regard to such deposits only if the total number of ADSs outstanding after the deposit does not exceed the number of ADSs previously approved by the Securities and Futures Bureau, plus any ADSs issued pursuant to the events described above; and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled.

As a result of the limited ability to deposit common shares into our ADS program, the prevailing market price of our ADSs on the New York Stock Exchange, or NYSE, may differ from the prevailing market price of the equivalent number of our common shares on the TWSE.

You 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.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our stockholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer you those rights unless the distribution to ADS holders of both the rights and any related securities are either registered under the U.S. Securities Act of 1933, as amended, or the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

Changes in exchange controls that restrict your ability to convert proceeds received from your ownership of ADSs may have an adverse effect on the value of your investment.

Your ability to convert proceeds received from your ownership of ADSs depends on existing and future exchange control regulations of the ROC. Under the current laws of the ROC, an ADS holder or the depositary, without obtaining further approvals from the Central Bank of the ROC (Taiwan) or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including U.S. dollars, in respect of:

 

    the proceeds of the sale of common shares represented by ADSs or received as share dividends with respect to the common shares and deposited into the depositary receipt facility; and

 

    any cash dividends or distributions received from the common shares represented by ADSs.

 

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In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional ADSs. If you withdraw the common shares underlying your ADSs and become a holder of our common shares, you may convert into NT dollars subscription payments for rights offerings. The depositary may be required to obtain foreign exchange approval from the Central Bank of the ROC (Taiwan) on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the Central Bank of the ROC (Taiwan) will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

Under the ROC Foreign Exchange Control Law, the Executive Yuan of the ROC may, without prior notice but subject to subsequent legislative approval rendered within ten days from such imposition, impose foreign exchange controls or other restrictions in the event of, among other things, a material change in domestic or international economic conditions which might threaten the stability of the domestic economy in Taiwan.

You 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.

 

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Our legal and commercial name is Chunghwa Telecom Co., Ltd. We were officially established on July 1, 1996 as part of the privatization efforts by the government of the ROC and operate under the Statute of Chunghwa Telecom Co., Ltd. Prior to our formation, we were operating as a business unit of the Directorate General of Telecommunications, which was formerly the NCC. The common shares of the Company have been listed on the TWSE under the number “2412” since October 2000 and its ADSs have been listed on the NYSE under the symbol “CHT” since July 2003. In August 2005, we became a privatized company as the ownership by the government of the ROC was reduced to less than 50%. Today, we are the largest full telecommunication service provider in Taiwan. Our principal executive offices are located at 21-3 Hsinyi Road, Section 1, Taipei, Taiwan, ROC, and our telephone number is (886) 2-2344-5488. Our website address is http://www.cht.com.tw. The information on our website does not form a part of this annual report. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.

 

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We are the largest telecommunications service provider in Taiwan and one of the largest in Asia in terms of revenue. As an integrated telecommunications service provider, our principal services include:

 

    domestic fixed communications services, including local and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services, Wi-Fi services, MOD services, domestic data services and other domestic services;

 

    mobile communications services, including mobile voice and data services, sales of mobile handsets, tablets, data cards and other mobile services;

 

    internet services, including HiNet, our internet service, internet value-added services, or VAS, data communication services, internet data center services, and other internet services;

 

    international fixed communications services, including international long distance telephone services, international leased line services, international data services, satellite services and other international services; and

 

    other services, including non-telecom services.

In addition to these traditional telecommunication services, we also focus on selected ICT services and advanced development.

For each of our key services, we enjoy leading positions across a number of areas in terms of both revenues and customers:

 

    we are Taiwan’s largest fixed communications services provider as well as Taiwan’s largest mobile communications service provider;

 

    we are Taiwan’s largest broadband access provider; and

 

    we are Taiwan’s largest internet service provider.

In 2015, our revenues were NT$231.8 billion (US$7.1 billion), our consolidated net income was NT$42.9 billion (US$1.3 billion) and our basic earnings per share was NT$5.42 (US$0.17).

In 2015, we made capital expenditures totaling NT$25.1 billion (US$0.8 billion), of which 41% was related to our domestic fixed communications business, 34% was related to our mobile communications business, 19% was related to our internet business, 4% was related to our international fixed communications business and 2% was related to our other businesses. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a detailed discussion of our capital expenditures.

Competitive Strengths

We believe that we are well positioned to take advantage of the increasing opportunities in the telecommunications market in Taiwan as new technologies evolve. In particular, we have maintained our leading market share in mobile communications and internet services. Furthermore, we have enjoyed greater flexibility in making purchasing and other business decisions after we were privatized in August 2005.

We believe that further deregulation and market liberalization will continue to drive the growth of the overall market for telecommunications services in Taiwan, as well as the development of new products and services. We expect to benefit from additional opportunities as the telecommunications market in Taiwan continues to grow.

We believe that our primary competitive strengths are:

 

    our premium brand and broad customer base in Taiwan;

 

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    our position as an integrated, full-service telecommunications provider in Taiwan; and

 

    our capital resources and technology, which we believe we can build on to expand our leading position in the mobile communications and internet services markets, including through our continued construction of our existing 4G mobile broadband networks, our expansion of FTTx broadband access services, IP-based MOD services, fixed-line/mobile VAS and cloud computing related services.

We have premium brand and broad customer base in Taiwan.

We are the largest telecommunications service provider in Taiwan with a broad customer base across all of our service offerings. Despite deregulation and an increase in competition in the Taiwanese telecommunications industry, we have maintained a market leading position in our primary service offerings of fixed communications, mobile communications and internet services. We believe our broad customer base in each of our service offerings grants us a distinct competitive advantage to maintain our existing customers and attract new customers and increases the chance of success for the launch and popularization of new products. As the telecommunications industry continues its trend of converging fixed communications, mobile communications and internet services, we believe that our comprehensive service offerings place us in a strong position to offer converged products and services to our customers. In addition, by leveraging our capability to analyze Big Data, we are able to adopt marketing initiatives to target different customer groups’ interests and preferences and increase the effectiveness of our cross-marketing efforts of our products and services to our existing and potential customers.

We are an integrated full-service telecommunications provider in Taiwan.

We are the largest telecommunications service provider in Taiwan with a leading position in fixed communications services, mobile communications services and internet services.

Broad range of communications products and services. We believe that our ability to provide an attractive and comprehensive range of telecommunications services positions us to provide bundled and VAS to our business and residential customers. In addition, we are able to offer innovative integrated services and tariff packages to meet the specific needs of our customers.

Broad network coverage. The breadth of our network and our ownership of the “last-mile” infrastructure in Taiwan, which comprises the connection between the local telephone service provider’s switching centers to the end-users’ buildings or homes, provides us with access to existing and potential customers and creates a platform for expanding our services. In order to provide higher bandwidth services for our customers, we have been constructing our FTTx network since 2003. We have successfully migrated many of our customers from lower-speed to higher-speed internet access services and upgraded ADSL subscribers to FTTx, which offers even higher speeds by using fiber optic technology. The number of our FTTx subscribers has exceeded that of our ADSL subscribers since 2011. As of December 31, 2015, network coverage of FTTx with speeds of 100 Mbps and higher was approximately 87.44%. In addition, our mobile communications network provides nationwide coverage. Our large mobile spectrum allocation together with our extensive network coverage positions us well for the continued expansion of our mobile services in Taiwan. We are also continuing to build our Wi-Fi network to offload mobile network capacity in residential areas and public areas where subscriber density and usage is high, such as urban areas, airports and convenience stores.

Brand awareness, distribution channels and customer service. Our principal brands “Chunghwa Telecom,” “emome” and “HiNet” have a reputation for quality and reliability. We serve our large and well-established customer base through our extensive customer service network in Taiwan. See “—B. Business Overview—Marketing, Sales and Distribution—Sales and Distribution”. We are continuing to expand and transform our retail stores while increasing the number of our service centers throughout Taiwan. We also offer comprehensive and high-quality point of sale and after sale services in our service centers, stores and over the internet. Our

 

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extensive sales and distribution channels help us attract additional customers and develop new business opportunities. In 2015, we obtained several domestic and international awards which recognized our service quality, corporate governance and our fulfillment of corporate social responsibility. In the Reader’s Digest Trusted Brands Awards, we have stood out and won the Platinum Award of Telecom Company in Taiwan for 11 consecutive years since 2005. We also were awarded the 2015 Best Practices Award for Taiwan Mobile Service Providers by Frost & Sullivan. In addition, we have been awarded The Asset Corporate Platinum Award by The Asset Magazine for three consecutive years since 2013. We were also ranked among the top five percent of TWSE-listed companies and the Taipei Exchange traded companies for corporate governance based on an evaluation conducted by TWSE in 2015. Furthermore, we were also awarded the Excellence in Corporate Social Responsibility Award in Taiwan by Common Wealth Magazine for nine consecutive years since 2007.

Operational expertise. Our management and employees have extensive operating experience and technical knowledge, which we believe cannot be easily replicated by competitors. We also believe we will continue to attract and retain high quality employees.

We have the capital resources and technology to enhance our leading position.

Strong capital structure. We believe we have great financial resources in Taiwan. Our low debt-to-equity capital structure, together with our strong operating cash flows, provides us with the flexibility and resources to invest in capital intensive and growing businesses. In particular, we continue to invest in broadband internet protocol networks, fiber-optic networks, and 4G mobile broadband networks and services. We will continue to make investments in or to acquire other companies which provide complementary telecommunications and internet-related services to further expand our business and offer new products and services.

Advanced network technology. In recent years, we have upgraded some of our FTTx access networks to FTTH access networks, aiming at promoting our broadband services from megabit connectivity to gigabit connectivity and strengthening our leading position in bandwidth services in our industry. In 2015, we also continued to deploy our 4G mobile broadband networks. Our investment in network infrastructure places us in a position to capture a significant share of the internet and high-speed data transmission market.

Research and development expertise. In 2015, our research and development expenses accounted for 1.6% of our revenues. We believe our focus on research and development will allow us to efficiently develop and deploy new technologies and services ahead of our competitors.

Business Strategies

Our key strategic objectives are to maintain our position as a leading integrated telecommunications services provider in Taiwan and to enhance our leadership position in growing markets, such as fixed-line, mobile data, and VAS. By leveraging our solid customer base, expanded network capacity and enhanced network capability, we have been continuously enhancing our fixed and mobile VAS offerings and promotion. We have also introduced new ICT services as well as cloud computing services by leveraging enterprise high speed broadband demand to offer VAS and explore emerging service.

Consistent with our strategic objectives, we have developed the following business strategies:

Focus on our core strengths while expanding our scope of services to capture new growth opportunities

Our core strengths are the management of telecommunication networks and the provision of services over these networks. We currently operate several networks linked by a core backbone infrastructure consisting of public switched telephone, mobile, ADSL, FTTx and internet protocol networks. Our strategy for each network differs depending on the market dynamics and future growth prospects of services delivered over these networks. In general, we endeavor to maintain our strong market position and seek to expand the scope of our business beyond network services by offering VAS to capture new opportunities and generate revenue growth.

 

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Broadband services: We strive to maintain our broadband market share. We typically realize higher average revenue per user, or ARPU, for our FTTx internet services, and we expect to continue to offer various incentives for our ADSL customers to upgrade to FTTx services and for our FTTx customers to upgrade to even higher speed FTTx services. Therefore, we are continuing the build-out of our FTTx infrastructure, especially FTTH construction, to monetize our investment, instead of network coverage enhancement. We believe these efforts will help us maintain our competitive advantage for broadband services. A high quality broadband network is also essential for our high-definition MOD services.

Mobile Communications: We obtained the 4G mobile broadband license in April 2014 and launched our 4G mobile broadband services in May 2014. In March 2016, we obtained the mobile broadband license for 2500MHz and 2600MHz frequency bands which enables us to enhance our 4G mobile broadband network. Our strategy for mobile services includes the following initiatives:

 

    Accelerating 4G mobile broadband network construction to accommodate the increasing mobile data usage from consumers as a result of the growth of connected devices, such as smartphones and tablets;

 

    Encouraging the migration of 2G service subscribers to 3G and 4G mobile services by offering promotions on various mobile handsets combined with attractive VAS and product packages;

 

    Introducing low- to mid-tier smartphones to expand our mobile internet subscriber base; and

 

    Constructing more Wi-Fi hotspots to offer more wireless internet access service and to offload data traffic from our mobile networks; we had established 55,000 Wi-Fi hotspots by the end of 2015. In addition, the mobile broadband services license for 2500MHz and 2600MHz frequency band spectrum which we obtained in March 2016 will help disperse heavy traffic in metropolitan areas.

Internet services: Our strategy for internet services is to continue to build on the success of our HiNet internet services and enhance our internet VAS, such as online games, internet music, internet banking and internet protocol video services, including hiChannel, an internet platform where customers can view videos and multimedia content. In addition, to cater to customers’ increasing demand for e-commerce payment systems, we are also developing a trusted service manager, or TSM, a platform to support multiple payment interfaces supporting mobile payment and third-party payment. The TSM platform commercial service launched on December 30, 2014 and provides mobile phone users a variety of payment methods. We are currently cautiously evaluating the timing to launch third-party payment services.

Emerging services: Our emerging services primarily include ICT and cloud computing services. We have been providing ICT services since 2009. We continue to leverage our core telecommunication infrastructure and services to expand ICT services, including intelligent energy network, or iEN, intelligent transportation service, or ITS, IoT, smart factory and smart city services. Our experience with ICT services positions us well to develop and offer cloud computing services. Underpinning the rollout of our cloud computing services is our capability and experience in offering data center services to corporate customers, which includes our ongoing initiative to build the largest cloud computing data center in Taiwan in anticipation of the growing demand for this service. In 2013, we began the construction of our cloud data center in Panchiao, New Taipei City. The Panchiao Internet Data Center, or IDC, is expected to commence operations in the second quarter of 2016 and will offer high reliability, high speed and high security cloud services to multi-national and domestic corporate customers. With the strength and reliability of our technologies and services, we believe that we have the competitive advantages to continue expanding our cloud computing services in the future.

We consistently expand the scope and variety of our integrated services to create more value for our customers. We have been developing an OTT platform and building relationships with content providers and service providers to offer attractive content and services on the platform. Our strategy on MOD/VOD/OTT services is to enrich content, including by providing movies, drama, and TV series for SVOD, to enhance the user interface, to leverage our existing base of fixed broadband and 4G mobile broadband subscribers to boost our MOD and OTT subscribers, and to acquire content with all rights across different devices to become the leading IPTV/OTT service provider in Taiwan.

 

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Emphasize quality of service and customer satisfaction

Quality of service is critical in attracting and retaining customers and enhancing our long-term profitability. In order to continually enhance and improve the quality of our services, we have, in addition to the quality assurance function of our regular operating units, established a number of dedicated task forces to monitor our network performance. Our senior management sets our quality evaluation criteria and regularly reviews the quality of our performance.

In order to ensure that our quality of service will translate into strong customer loyalty, we continue to focus on and invest in the provision of a full range of services that emphasize customer care from the point of sale onward. For example, we have extended the focus of our corporate customer services from major accounts to include small and medium-sized enterprises and in January 2007 established our Enterprise Business Group. As of December 31, 2015, our Enterprise Business Group employed 512 professionals and offered packaged and customized services, customer-oriented solutions and integrated ICT services. We have completed the integration of our call centers, all of which can now be reached by calling a single number “123”. We offer 24-hour customer service, including the handling of service and billing inquiries. To improve the quality of our customer services, we implemented a customer relationship management system, which encompasses a customer complaint system, a business information database for the use of our call centers, and a Big Data system to enhance our sales and market analysis efforts. For example, we leverage our capability to analyze Big Data in identifying locations for constructing base stations and target groups for marketing our services.

In addition, we own hundreds of physical service stores, and we will continue to renovate our traditional service stores to enhance user experience. Please refer to “—Competitive Strengths—We are an integrated full-service telecommunications provider in Taiwan” for a discussion of our distribution channels.

Improve operational efficiency and cost structure

We have historically been focused, and will continue to focus, on cost control, particularly in the areas of network efficiencies and personnel costs. We continue to improve our operational efficiency and cost structure by migrating to more advanced networks and sophisticated operational support systems, and efficiently managing our workforce.

Capital expenditures. Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. To catch up with the fast evolution of digital devices and network applications, we continue the construction of our fiber-based fixed-line and mobile network to increase the network bandwidth and enhance operational efficiencies. We continue to accelerate LTE network construction to enhance population coverage and construct high capacity Wi-Fi/Fiber-Wireless networks to offload mobile network traffic, and precise FTTH construction to improve operational efficiency and reduce operating cost. We will continue to leverage our core telecommunication infrastructure and services to expand the ICT business, including cloud services, enterprise total solutions and government projects.

Personnel reallocation. We seek to improve our operational efficiency by reducing our personnel costs. On January 30, 2013, we set up Honghwa International Co., Ltd. (formerly known as Honghwa Human Resources Co., Ltd.), or Honghwa, in order to provide customer services, on-site equipment installation services and services in stores to our customers after the retirement of our personnel.

Expand our business through alliances, acquisitions and investments

We continuously expand our business in high-growth areas, such as ICT and cloud services, through alliances, acquisitions and investments. We believe that our experience, operational scale and large customer base make us an attractive ally for other service providers.

Alliances. We have formed and will continue to pursue alliances with content providers, multimedia service platform providers, customer premises equipment providers, internet portal operators, and ICT solutions partners

 

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to diversify our business operations and enhance our service offerings. In August 2015, we entered into an agreement with Microsoft Taiwan Corporation to provide integrated cloud solutions to end users. In September 2015, we became a member of Next Generation Mobile Networks (NGMN) Alliance to foster the growth of Taiwan’s mobile communications industry and help Taiwan connect to the international 5G ecosystem. In December 2015, we entered into an agreement with China Mobile Ltd. on a Hand-in-Hand Program to collaborate in areas including mobile business, data business, innovation and internet business.

We also aim to develop the city of industry technology intelligence. In December 2013, we formed the Taiwan Intelligent Aerotropolis Association, an association that focuses on the research, development and application of telecommunication and aerotropolis technology, together with other telecommunications enterprises and equipment suppliers. The formation of the association has strengthened our leading position in the industry and further supplemented our capability to develop smart city and aerotropolis products and services for government, industries and end users.

Acquisition and Investments. We have focused our acquisition strategy on making acquisitions of companies that we believe to be complementary to our long-term strategic goals. In addition, after our privatization, we have focused our investment strategy on the development of new businesses and the enhancement of our operation efficiency. Recently we have entered into the following notable transactions:

In January 2013, we set up Honghwa in order to provide on-site equipment installation services to our customers and the customers of other companies that have signed service agreements with Honghwa.

In November 2013, Taiwan Mobile Co., Ltd., or Taiwan Mobile, Asia Pacific Telecom, or APT, Vibo Telecom, or Vibo, EasyCard Corporation, Far EasTone Telecommunications Co., Ltd., or Far EasTone, and us established the Alliance Digital Technology Co., Ltd., or ADT, which mainly engages in the development of mobile payments and information processing services. We owned a 13.33% equity interest in ADT and had one seat out of five seats on the board of directors of ADT as of December 31, 2015.

In February 2014, we, together with Benefit One Asia Pte. Ltd., established Chunghwa Benefit One Co., Ltd., or Chunghwa Benefit One, and we owned a 50% equity interest in Chunghwa Benefit One. Chunghwa Benefit One mainly engages in providing an e-commerce platform for enterprises to provide employee benefits and for individuals.

Senao acquired 70% of the equity interests in Youth Co., Ltd and its subsidiaries, or Youth, in September 2015, and established 100% of the equity interests in Aval Technologies Co., Ltd. in October 2015. Both Youth and Aval Technologies Co., Ltd. are primarily engaged in the businesses of providing information technology services and selling communication products. In December 2015, Senao participated in the share subscription of Youth at a percentage different from its original ownership percentage. Therefore, Senao’s ownership interest in Youth increased from 70% to 89.48%.

Please also see Notes 3 and 16 to our consolidated financial statements included elsewhere in this annual report for our current strategic investments.

Going forward, we may consider making other equity investments and acquisitions that we believe are complementary to our business and strategic goals. Our future investment will be aimed at expanding our business scale and scope, making better use of our research and development resources and operational experience and increasing our revenues through investing mainly in six strategic areas, such as IoT, info-security, OTT, mobile VAS, enterprise business and IDC/Cloud.

Maintain focus on maximizing stockholder value

We are committed to maximizing stockholder value and intend to maintain a sustainable dividend policy. Following our privatization, we have more flexibility to implement capital management initiatives, including possible repurchases of our outstanding common shares and increases in our leverage through debt financing.

 

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Under the ROC Company Act, companies are allowed to distribute special cash dividend from capital surplus, which we had implemented at our annual general stockholders’ meetings in 2013 and 2014. See “Item 5. Operating and Financial Review and Prospects—Overview—Effect of adopting Taiwan IFRSs on our dividends and employee bonuses.” In addition, the accumulated legal reserve that we had set aside in previous years has amounted to the aggregate par value of our outstanding share capital. Therefore, according to relevant regulations, we are not required to appropriate profits to our legal reserve starting from 2015. With the approval of our board of directors in March 2016, our payout ratio was 99.41% in 2015 after adjusting for unappropriated earnings and reversal of the special reserve. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information.”

B. Business Overview

Our Principal Lines of Business

Our core business segments are our domestic fixed communications business, mobile communications business, internet business and international fixed communications business.

Domestic Fixed Communications Business

The provision of domestic fixed communications services is one of our principal business activities. Our domestic fixed communications business includes local telephone services and domestic long distance telephone services, broadband access services, local and domestic long distance leased line services, Wi-Fi services, multimedia on demand services, and other domestic services including ICT, corporate solution services, cloud computing services. We also provide interconnection with our fixed-line network to other mobile and fixed-line operators. Our revenues from domestic fixed communications services were NT$73.5 billion, NT$72.1 billion and NT$72.5 billion (US$2.2 billion), respectively, in 2013, 2014 and 2015, representing 32.2%, 31.8% and 31.3% of our total revenue in such periods. In general, we expect that revenues from our domestic fixed communications business as a percentage of our total revenues will continue to decline primarily due to mobile and VoIP substitution.

Local Telephone

The following table sets forth our revenues from local telephone services for the periods indicated.

 

     Year Ended December 31  
     2013      2014      2015  
     NT$      NT$      NT$      US$  
     (in billions)      (in millions)  

Local telephone revenues:

     

Usage

     17.9         16.0         14.5         442.3   

Subscription

     16.4         16.3         16.1         490.6   

Interconnection

     1.0         0.9         0.8         25.1   

Pay telephone

     0.3         0.3         0.3         8.4   

Other

     2.2         2.1         1.9         58.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     37.8         35.6         33.6         1,024.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

We provide local telephone services to approximately 11.2 million customers in Taiwan. Our fixed-line network reaches virtually all homes and businesses in Taiwan. Revenues from local telephone services comprised 16.6%, 15.7% and 14.5% of our total revenues in 2013, 2014 and 2015, respectively. Approximately 73.8% of our local telephone customers as of December 31, 2015 were residential customers. We are currently the leader of the local telephone service market, with an average subscriber market share of approximately 94.6%, 94.3% and 94.0% in 2013, 2014 and 2015, respectively.

 

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The following table sets forth information with respect to our local telephone customers and penetration rates as of the dates indicated.

 

     As of December 31  
         2013             2014           2015      
     (in thousands, except percentages
and per household data)
 

Taiwan population(1)

     23,374        23,434        23,485   

Fixed line customers:

      

Residential

     8,555        8,395        8,239   

Business

     3,017        2,970        2,928   

Total

     11,572        11,365        11,167   

Penetration rate (as a percentage of the population)

     49.5     47.5     47.5

Lines in service per household

     1.03        1.00        0.97   

 

(1) Data from the Department of Population, Ministry of the Interior, ROC.

With the continued development of mobile technologies and the disconnection of additional lines for dial-up services, demand for local customer lines has been declining. The number of fixed-line customers decreased by 1.8% in 2013 compared to 2012, 1.8% in 2014 compared to 2013 and 1.7% in 2015 compared to 2014. We attribute the decrease in fixed-line customers to a general industry-wide trend of migrating from fixed-line services to mobile and internet telephony services.

The following table sets forth information with respect to local telephone usage for the periods indicated.

 

     Year Ended December 31  
         2013             2014             2015      
     (in millions, except percentages)  

Minutes from local calls(1)(2)

     12,942        11,567        10,511   

Growth rate (compared to the same period in the prior year)

     (9.9 )%      (10.6 )%      (9.1 )% 

 

(1) Includes minutes from local calls made on pay telephones and minutes from fixed line-to-mobile calls.
(2) Calls to our HiNet internet service, which are recorded as part of our internet services, are not included in our local call minutes or revenues.

Minutes from local calls decreased in 2013, 2014 and 2015 due to the impact of mobile substitution and increased use of VoIP applications.

We charge our local telephone service customers a monthly fee and a usage fee. We also charge separate fees for some VAS. The monthly fees for our primary tariff plans are NT$70 for residential customers and NT$295 for business customers. Our primary peak time usage fee is NT$1.6 for three minutes, and our off-peak usage fee is NT$1.0 for ten minutes. Our usage fees are the same for residential and business customers.

The following table sets forth information with respect to the average local telephone usage charge per minute for the periods indicated.

 

     Year Ended December 31  
         2013             2014              2015      
     NT$     NT$      NT$  

Average local telephone usage fee (per minute)

     1.39        1.39         1.39   

Growth rate (compared to the same period in the prior year)

     (1.4 )%      —           —     

Average per minute usage charges decreased 1.4% to NT$1.39 in 2013, mainly due to more users switching to use mobile phones and VoIP telephony services, which also led to the decreases in total revenue derived from local telephone. Average per minute usage charges remained relatively stable from 2013 to 2015. Part of our

 

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competitive strategy is to offer customers innovative products and services intended to both secure customer loyalty and increase revenues. In particular, our VAS offerings are designed to increase our call revenues by increasing the number of calls our customers make and by receiving fees for usage of the VAS. These services include call waiting, caller identification, call forwarding, three-party calls, ring back tone and voicemail.

Domestic Long Distance Telephone

We provide domestic long distance telephone services in Taiwan. Total revenues from domestic long distance telephone services were NT$3.5 billion, NT$3.3 billion and NT$3.1 billion (US$0.1 billion) in 2013, 2014 and 2015, respectively, representing 1.5%, 1.5% and 1.3% of our total revenues in such periods. This decrease was mainly due to the continuous decline in call minutes resulting from the migration to mobile services and increased use of VoIP applications. Our average market share by minutes in the domestic long distance market was approximately 76.6%, 80.5% and 82.2% in 2013, 2014 and 2015, respectively.

We provide so-called “intelligent” network services over our domestic long distance network, including toll-free calling and virtual private networks, or VPN, services and others. We also focus on offering our customers an increasing number of VAS with flexible tariff packages.

Broadband (FTTx and ADSL) Access

We provide broadband internet access through connections based on our FTTx and ADSL technologies. FTTx generally offers a faster access medium for our internet customers compared to ADSL by using fiber optic technology. We are continuing the build-out of our FTTx infrastructure.

The following table sets forth our revenues from our broadband access services for the periods indicated.

 

     Year Ended December 31  
         2013              2014              2015      
     NT$      NT$      NT$  
     (in billions)  

Broadband access revenues:

        

Broadband access (FTTx and ADSL)

     19.1         19.1         19.3   

We provide broadband access services to other internet service providers that do not have their own network infrastructure, and as a result, our broadband customers also include some customers that use only our broadband data access lines and choose another provider for internet service provider, or ISP, services.

From 2013 to 2015, we continued accelerating our high speed FTTx household coverage. We currently offer various promotional packages to encourage more migration of our ADSL subscribers to our FTTx service and migration of our FTTx subscribers to higher speed FTTx service. In 2015, FTTx revenue reached 86.6% of our total broadband revenue. As of December 31, 2015, 92.5% of our FTTx service customers subscribe HiNet ISP service.

Our subscriber market share of Taiwan’s broadband market was approximately 77.7%, 76.7% and 75.8% in 2013, 2014 and 2015, respectively.

The following table sets forth our broadband service customers as of each of the dates indicated.

 

     As of December 31  
         2013              2014              2015      

FTTx service customers (in thousands)

     2,955         3,120         3,358   

ADSL service customers (in thousands)

     1,598         1,419         1,138   

Average downlink speed (Mbps)

     26.9         34.5         39.5   

 

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Our FTTx service offers downlink speeds of 6, 20, 60, 100, 300, 500 Mbps and 1 Gbps matched with uplink speeds of 2, 5, 20, 40, 100, 250 and 600 Mbps, respectively. Our ADSL service offers downlink speeds that range from 2 Mbps to 8 Mbps and uplink speeds that range from 64 kilobits per second, or Kbps, to 640 Kbps.

We have experienced competition in broadband from cable operators and other fixed-line operators. In addition, as faster wireless technologies, such as 4G LTE, have been deployed, some customers have replaced fixed broadband services with high-speed mobile broadband services. Our strategy is to continue the migration of ADSL subscribers to FTTx and the migration of FTTx subscribers to higher speed FTTx so as to maintain our competitiveness.

Charges for our FTTx and ADSL services include one-time installation charges and monthly subscription fees. These charges for our FTTx and ADSL services vary based on connection speed. Charges for our HiNet dial-up service include a monthly fee entitling the customer to a fixed number of minutes of service, with an additional charge per minute when the fixed number of minutes is exceeded. Alternatively, we offer our HiNet dial-up customers an unlimited number of minutes for a fixed monthly fee.

The following table sets forth our ARPU for each of the periods indicated.

 

     Year Ended December 31  
         2013              2014              2015      
     NT$      NT$      NT$  

ARPU for broadband services per month(1)

     704         704         714   

ARPU for FTTx services per month(2)

     859         838         828   

 

(1) ARPU for our broadband services per month is calculated as the sum of (a) broadband access revenues for the relevant period divided by the average of the number of our broadband access customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet ISP service revenues divided by the average of the number of HiNet ISP service subscribers on the first and last days of the period divided by the number of months in the relevant period.
(2) ARPU for FTTx services per month is calculated as the sum of (a) FTTx access revenues for the relevant period divided by the average of the number of our FTTx access customers on the first and last days of the period divided by the number of months in the relevant period and (b) HiNet FTTx ISP service revenues divided by the average of the number of HiNet FTTx ISP service subscribers on the first and last days of the period divided by the number of months in the relevant period.

Despite tariff reductions mandated by the NCC, our overall broadband ARPU increased in 2015, mainly due to our successful strategy in migration mentioned above. For more details of the NCC’s mandatory tariff reduction, please see “Item 5. Operating and Financial Review and Prospects—Overview—Tariff adjustments.”

Leased Line Services—Local and Domestic Long Distance

We are the leading provider of domestic leased line services in Taiwan. Leased line services involve offering exclusive lines that allow point-to-point connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

We provide data transmission services to major corporate customers in Taiwan. We also provide leased lines to other mobile and fixed-line service operators for interconnection with our fixed-line network and for connection within their networks.

The following table shows the bandwidth of local and domestic long distance lines leased to third parties as of each of the dates indicated.

 

     As of December 31  
     2013      2014      2015  
     (in gigabits per second, or Gbps)  

Total bandwidth

     1,054.7         1,359.1         1,556.8   

 

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The total bandwidth of local and domestic long distance lines leased to third parties increased from 2013 to 2015 mainly due to the demand of the bandwidth of backbone network for 4G mobile broadband services.

Rental fees for local leased lines are generally based on transmission speed while domestic long distance leased line rental fees are generally based on transmission speed and distance. We continue to experience a decline in rental fees for all of our leased line products. We attribute the general decline in rental fees since 2000 to a general migration toward broadband services and increased competition from other service providers constructing their own lines mentioned above. In response, we continue to implement marketing and service campaigns to retain our high-value corporate customers for our leased line products. Our local and domestic long distance leased line services revenues were NT$5.1 billion, NT$4.6 billion and NT$4.4 (US$0.1 billion) in 2013, 2014 and 2015, respectively. Although the bandwidth leased to third parties increased in 2014 and 2015, the revenue decreased year over year mainly due to the decline in rental fees described above.

Wi-Fi Services

As of December 31, 2013, 2014 and 2015, we had a total of approximately 1.8 million, 2.0 million and 2.4 million residential and business customers that leased our access points, respectively. In addition, we had established 55,000 hot spots in public areas by the end of 2015, such as convenience stores, airports and international convention centers, where our smartphone subscribers can access our Wi-Fi network and help to offload mobile data network traffic.

MOD Services

Using video streaming technology through a set top box that connects to our FTTx and ADSL data connections, our MOD customers can access TV programs, video-on-demand and other services. We had over 195 broadcasting channels and over 20,000 hours of on-demand programs and served approximately 1.3 million customers as of December 31, 2015. Also, as of December 31, 2015, we offered 152 high definition, or HD, channels and other HD video-on-demand programming, such as sports, movies and knowledge materials. Since 2013, we offered “TV Everywhere” service for our MOD subscribers to enjoy a seamless program viewing experience across multiple platforms, including smartphones, tablets and PCs. In addition to our regular packaged offerings, we also offer subscription video on demand, or SVoD, services for film and drama. As of December 31, 2015, we had 475 thousand SVOD subscribers. Our MOD revenues from 2013 to 2015 were NT$2.2 billion, NT$2.6 billion and NT$2.5 billion (US$0.1 million) in 2013, 2014 and 2015, respectively. The increase in revenue from 2013 to 2014 was mainly due to a continuous increase in the number of subscribers that purchased packaged offerings. With a solid base of 1.3 million customers that is expected to steadily expand, starting from 2015, we began adjusting our cooperation schemes with channel providers. The new schemes bring down our operating expenses while also impacting our revenues at the same time. We expect this structural shift to enhance our IPTV margins in the mid-to-long term.

ICT and Other Services

Our ICT and other services in domestic fixed communications business include ICT services, corporate solution and bill handling services. See “Emerging Services”.

Mobile Communications Business

Mobile communications services are one of our principal business activities. Our mobile communications services include mobile services, sales of mobile handsets, tablets and data cards and ICT and other mobile services.

Mobile Services

We are Taiwan’s largest provider of mobile services in terms of both revenues and customers. In 2013, we generated revenues of NT$76.7 billion, or 33.6% of our total revenues, from mobile services. In 2014, we

 

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generated revenues of NT$77.5 billion, or 34.2% of our total revenues, from mobile services. In 2015, we generated revenues of NT$80.9 billion (US$2.5 billion), or 34.9% of our total revenues, from mobile services. In 2013, we continued to migrate customers (1) from 2G to 3G with additional data plans and (2) from 3G voice only to data plan adoption. As a result, our mobile VAS revenue grew by 38.4% from 2012 to 2013. It further grew by 22.5% from 2013 to 2014 and by 13.8% from 2014 to 2015 due to the continuous mobile internet adoption and fast development in the 4G mobile broadband segment in our industry.

 

     Year Ended December 31  
     2013      2014      2015  
     NT$      NT$      NT$      US$  
     (in billions)      (in millions)  

Mobile services revenues:

           

Usage(1)

     40.1         36.0         35.8         1,090.3   

Interconnection

     6.0         4.8         3.7         113.9   

Mobile VAS

     28.3         34.8         39.6         1,207.3   

Other

     2.3         1.9         1.8         54.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mobile services

     76.7         77.5         80.9         2,466.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes monthly fees.

As the market for mobile services has continued to expand, we have experienced growth in our mobile customer base. We are the largest mobile operator in Taiwan in terms of revenues and number of customers. We had 11.2 million mobile customers, for a market share of approximately 38.1% of total mobile customers and approximately 37.2% of total mobile services revenues in Taiwan, as of December 31, 2015.

In October 2013, we obtained a 4G mobile broadband services spectrum of 10 MHz paired spectrum in the 900 MHz frequency band and 25 MHz paired spectrum in the 1800 MHz frequency band. In November 2013, we paid NT$39.1 billion to the government for the spectrum. The license is valid until December 31, 2030. We have launched 4G mobile broadband services in May 2014 and deployed our 4G mobile broadband networks for better coverage. By the end of 2015, our 4G mobile broadband network population coverage had reached 99% for the whole country. We will continue enhancing our 4G mobile broadband network capacity.

In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired spectrum in the 2500MHz and 2600MHz frequency bands, and we paid NT$10.0 billion to the government in the same month. The license is valid until December 31, 2033. We put these 2500MHz and 2600MHz frequency bands into use on March 24, 2016.

In February 2002, the MOTC granted 3G mobile services concessions to five companies, including us. In March 2002, we paid NT$10.2 billion to the government for our concession. Our 3G mobile services license is valid until December 31, 2018. In July 2005, we launched our 3G mobile services, using WCDMA technology. See the detail in mobile spectrum allocation in “Network Infrastructure”.

We offer the largest international roaming network among Taiwan mobile service providers. By the end of 2015, our 3G roaming contracts includes 265 networks in 99 countries, our 2G GSM roaming contracts include 461 networks in 198 countries, and our 2.5G GPRS roaming contracts include 393 networks in 154 countries. We have also established 4G LTE roaming contracts with 70 networks in 49 countries.

 

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The following table sets forth information regarding our mobile service operations and our mobile customer base for the periods indicated.

 

     As of or for the Year Ended December 31  
     2013     2014     2015  

Taiwan population (in thousands)(1)

     23,374        23,434        23,485   

Total mobile revenues in Taiwan (in billions)(2)

     NT$216.8        NT$207.6        NT$217.1   

Annualized churn rate(3)

     13.87     13.61     18.17

Minutes of usage (in millions of minutes)

      

Incoming

     12,372        12,043        11,428   

Outgoing

     12,316        12,243        11,626   

Average minutes of usage per user per month(4)(5)

     197        186        172   

 

(1) Data from the Department of Population, Ministry of the Interior, ROC.
(2) Data from the statistical monthly release by the NCC, in the ROC, which include mobile revenues 2G, 3G, PHS, and since 2014, 4G mobile broadband services.
(3) Measures the rate of customer disconnections from mobile service, determined by dividing (a) our aggregate voluntary and involuntary deactivations (excluding deactivations due to customers switching from one of our mobile services to another) during the relevant period by (b) the average number of customers during the period (calculated by averaging the number of customers at the beginning of the period and the end of the period), and multiplying the result by the fraction where (c) the numerator is 12 and (d) the denominator is the number of months in that period. The calculation includes both prepaid and postpaid customers.
(4) The number of mobile customers is based on the number of subscriber identification module, or SIM, cards. Since 2006, the total number of mobile customers in Taiwan included 2G, 3G and personal handy-phone system, or PHS, customers. Since 2014, the number of mobile customers also included 4G mobile broadband customers. The number of our mobile customers also includes our prepaid and VPN customers.
(5) Average minutes of use per user per month is calculated by dividing the total minutes of use during the period by the average of the number of our mobile customers on the first and last days of the period and dividing the result by the number of months in the relevant period.

The total mobile customers in Taiwan had reached approximately 29.4 million as of December 31, 2015. Mobile penetration was approximately 125.1% on the same date. The overall mobile services market experienced a slight increase of 4.6% in revenues in 2015 mainly due to the growth in overall 4G mobile broadband market, which brings in more mobile internet subscribers. As of December 31, 2015, we had 4.4 million, 6.1 million and 0.7 million subscribers for 4G, 3G and 2G services, respectively.

We began offering prepaid card services in October 2000, prepaid 3G card services in February 2008, and prepaid 4G card services in April 2015. As of December 31, 2015, we had approximately 1.7 million prepaid customers, representing approximately 15.5% of our total mobile customers. Prepaid customers do not pay monthly fees but pay a higher usage charge on a per second basis. Once the prepayment has been fully utilized, a prepaid customer can make additional prepayments to continue the service. Alternatively, the customer may convert to become a post-paid customer while retaining the same telephone number.

We offer incentives, such as mobile handset subsidies, when new customers agree to sign a service contract with us or when existing customers renew their contracts with us ranging from 12 months to 30 months. We generally offer subsidies on mobile handsets equipped with more advanced data functions to promote the expansion of our 3G and 4G mobile services. Smartphones accounted for 90.0% of the total handsets we offered in 2015. We expect our average subsidy per handset in 2016 to continue to decrease as we focus more on promoting low- to mid-tier smartphones. At the same time, we expect to maintain our mobile internet market leadership.

Our tariffs for post-paid mobile customers primarily consist of usage fees and monthly fees. We also offer discounts on usage fees for calls made between our mobile customers to encourage subscription to our mobile service.

 

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When our customers are outside Taiwan, they pay roaming charges plus international long distance charges and, where applicable, local charges in roaming destinations. We have already signed agreements with some providers in foreign countries for strategic cooperation for our roaming business.

Our ARPU per month decreased to NT$593 in 2014 from NT$611 in 2013 due to lower promotional tariffs that we offered in 2014 to attract more subscribers and an increase of the total number of subscribers. Our ARPU per month increased to NT$604 in 2015 from NT$593 in 2014, primarily due to successful 4G mobile broadband migration which attracted additional mobile internet subscribers.

In addition to our basic mobile services, we also offer a broad range of value-added telecommunications and information services. Revenues from mobile VAS represented 37.0%, 44.9% and 49.0% of our total mobile services revenues in 2013, 2014 and 2015, respectively. The increase of mobile VAS revenue percentage was mainly attributed to the increase in mobile data plan subscriber number.

Sales of Mobile Handsets, Tablets and Data Cards

We engage in the distribution and sales of mobile handsets, tablets and data cards for use on our mobile network to customers through our directly-owned stores, our subsidiary Senao, and also through third-party retailers. See “Marketing Strategy—Distribution Channels” and “Sales and Distribution” in “—Marketing, Sales and Distribution”.

ICT and Other Services

Our ICT and other services in our mobile communications business include ICT services, corporate solution and bill handling services. See “Emerging Services”.

Internet Business

Our internet business includes HiNet, our internet service provider, internet VAS, data communication services, internet data center, or IDC, services, and ICT and other internet services. Our internet revenues represented 11.2%, 11.5%, and 11.1% of our revenues in 2013, 2014 and 2015, respectively.

HiNet Internet Service

We are the largest ISP in Taiwan, with a subscriber market share of 68.3% as of December 31, 2015. As of December 31, 2015, HiNet had approximately 4.2 million subscribers. Our HiNet internet service generated revenues of NT$17.2 billion, NT$17.2 billion and NT$17.5 billion (US$0.5 billion) in 2013, 2014 and 2015, respectively. Our ISP service subscribers decreased from 2013 to 2015 mainly due to substitution by mobile broadband services and the competition from cable broadband operators. Although the number of our ISP service subscribers decreased, the revenues slightly increased from 2013 to 2015 primarily due to the migration of our subscribers to higher speed service.

The following table sets forth HiNet’s subscribers as of each of the dates indicated.

 

     As of December 31  
     2013      2014      2015  
     (in thousands, except
percentages)
 

Total internet subscribers in Taiwan

     6,158         6,178         6,151   

HiNet subscribers:

        

HiNet FTTx subscribers

     2,683         2,843         3,083   

HiNet ADSL subscribers

     1,099         948         688   

HiNet dial-up subscribers

     454         439         426   

Other access technology subscribers

     3         3         2   
  

 

 

    

 

 

    

 

 

 

Total HiNet subscribers

     4,239         4,233         4,199   
  

 

 

    

 

 

    

 

 

 

 

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We have maintained our leading market position despite operating in a highly competitive market with approximately 421 ISPs in Taiwan. As of December 31, 2015, approximately 93.4% of our broadband customers were also HiNet subscribers, using HiNet as their ISP. We expect the competitive conditions currently prevailing in the internet service provider market to continue to intensify.

Internet VAS

Our HiNet portal at www.hinet.net provides VAS to our customers, such as network security, Blog, travel, games, e-learning, music, video, anti-virus and links to other portals. We charge fees for some of these services. We also receive commissions for transactions completed on some of these other portals. Our internet video portal at www.hichannel.hinet.net offers online entertainment services through the internet. In particular, our HiNet broadband (FTTx and ADSL) subscribers can access music, television programs, movies and other multimedia content on demand. We charge access fees for some of this content. We expect the revenues generated from these VAS to continue to grow in the long run.

Data Communication Services and IDC Services

We provide a wide range of managed data services, including frame relay services, asynchronous transfer mode services, and VPN services. Frame relay services provide high-speed data communications linking remote sites. Asynchronous transfer mode services are used to handle high-bandwidth, integrated voice, video, data and internet traffic between sites.

IDCs are facilities providing the physical environment necessary to keep computer network servers running at all times. These facilities are custom-designed with high-volume air conditioning temperature control systems, secure access, reliable electricity supply and connections to high-bandwidth internet networks. Data centers house, protect and maintain network server computers that store and deliver internet and other network content, such as web pages, applications and data. We currently have the largest floor area of internet data centers in Taiwan compared to our competitors in Taiwan. We offer co-location, web hosting and application service provider services.

ICT and Other Services

Our ICT and other services in our internet business include government services, corporate solution and ICT and cloud services. See “Emerging Services”.

International Fixed Communications Business

Our international fixed communications business includes international long distance telephone services, international leased line services, international data services, satellite services and ICT and other international services.

International Long Distance Telephone

We provide international long distance telephone services in Taiwan. Total revenues from international long distance telephone services comprised 4.9%, 4.6% and 4.2% of our revenues in 2013, 2014 and 2015, respectively. In addition, we provide wholesale international long distance services to international simple resale operators that do not possess their own telephone network or infrastructure. Our international long distance telephone revenues decreased by 7.3% to NT$10.4 billion in 2014, and further decreased by 7.5% to NT$9.6 billion (US$0.3 billion) in 2015, primarily due to the increased competition from VoIP-based international long distance service providers and free VoIP applications.

Our average market share of the international long distance market by minutes was approximately 55.1%, 56.0%, and 57.8% in 2013, 2014 and 2015, respectively. However, the overall market for international long

 

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distance services declined due to the intense competition from VoIP-based international long distance service providers and free VoIP applications. Our international long distance services consist primarily of international direct dial services and the wholesale of international long distance traffic.

We commenced the wholesale of international long distance minutes to licensed domestic international simple resale, or ISR operators, and other international carriers in 2001. The domestic ISR operators require fixed-line operators in Taiwan, such as us, to provide international long distance telephone services to their end-users. In 2013, 2014 and 2015, we sold 743 million, 699 million and 786 million minutes of wholesale international long distance traffic, which represented approximately 35.5%, 42.1%, and 58.4% of our total outgoing international long distance traffic, respectively. Despite the decrease in international long distance traffic volume, revenues from the wholesale of international long distance minutes increased by 6.8% to NT$3.3 billion in 2014, and further increased by 13.5% to NT$3.7 billion (US$0.1 billion) in 2015, primarily due to our focus on expanding such services in higher-unit-price areas, such as Central and South America, Africa, Asia and Middle East.

International calls to our top five destinations represented 65.4% of our outgoing international long distance call traffic in 2015. International calls from our top five destinations represented 44.9% of our incoming international long distance call traffic in 2015.

The following table shows the percentage of total outgoing international long distance minutes for our top five outgoing destinations in 2015.

 

Destination

   Percentage of Total
Outgoing Minutes (%)
 

Mainland China

     31.1   

Indonesia

     13.7   

Philippines

     10.8   

Hong Kong

     5.2   

United States

     4.6   
  

 

 

 

Total of top five destinations

     65.4   
  

 

 

 

The following table shows the percentage of total incoming international long distance minutes for our top five incoming destinations in 2015.

 

Destination

   Percentage of Total
Incoming Minutes (%)
 

Mainland China

     16.3   

United States

     9.8   

Canada

     7.7   

Spain

     5.6   

Hong Kong

     5.5   
  

 

 

 

Total of top five destinations

     44.9   
  

 

 

 

The following table sets forth information with respect to usage of our international long distance services for the periods indicated.

 

     Year Ended December 31  
     2013      2014      2015  
     (in millions, except
percentages and incoming/
outgoing ratio)
 

Incoming minutes

     1,198         983         937   

Outgoing minutes

     2,095         1,658         1,346   

Total minutes

     3,293         2,641         2,283   

Incoming/outgoing ratio

     0.57         0.59         0.70   

 

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Total incoming call volume decreased by 17.9% from 2013 to 2014, and further decreased by 4.7% in 2015, mainly due to the intensified market competition from VoIP-based international long distance service providers and other international long distance service providers. Similarly, due to this intensified competition, total outgoing call volume decreased by 20.9% from 2013 to 2014 and further decreased by 18.8% in 2015.

Outgoing calls made by customers in Taiwan and by customers from foreign destinations using Taiwan direct service are billed in accordance with our international long distance rate schedule for the destination called.

Rates vary depending on the time of day at which a call is placed. Customers are billed on a six-second unit basis for international direct dial services.

The following table sets forth information with respect to the average international long distance usage charge per minute that we received for outgoing international calls during the periods indicated:

 

     Year Ended December 31  
         2013              2014              2015      

Average international long distance usage charge (per minute)

   NT$ 3.8       NT$ 4.4       NT$ 5.0   

Average charge per minute increased 11.8%, 15.8% and 13.6% in 2013, 2014 and 2015, respectively, mainly due to our focus on expanding the wholesale of international long distance minutes in higher-unit-price areas, such as Central and South America, Africa, Asia and Middle East.

We pay for the use of networks of carriers in foreign destinations for outgoing international calls and receive payments from foreign carriers for the use of our network for incoming international calls. Traditionally, these payments have been made pursuant to settlement arrangements under the general auspices of the International Telecommunications Union. Settlement payments are generally denominated in U.S. dollars and are made on a net basis.

The following table sets forth information with respect to our gross international settlement receipts and payments during the periods indicated.

 

     Year Ended December 31  
     2013          2014          2015  
     NT$      NT$      NT$      US$  
     (in billions)      (in millions)  

Gross international settlement receipts

     3.3         3.2         2.8         85.4   

Gross international settlement payments

     6.0         6.5         6.4         195.2   

Our payments to international carriers on an aggregate basis have been greater than our receipts from these carriers primarily because our customers’ outgoing minutes exceeded incoming minutes. International settlement payments increased in 2014 mainly attributable to our actively promotion for international wholesale business mentioned above. However, international settlement receipts slightly decreased in 2014 primarily due to the decrease in the incoming minutes, which was primarily due to the worldwide trend of VoIP substitution. VoIP substitution is also the reason why both receipts and payments decreased in 2015.

In order to compete more effectively in the international long distance market, we have implemented innovative and customized discount calling plans and marketing campaigns directed at high-usage business customers.

Leased Line Services—International

We are a leading provider of international leased line services in Taiwan. Leased line services involve offering exclusive lines that allow point-to-point connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications service providers to establish networks to offer telecommunications services.

 

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We provide data transmission services to major corporate customers in Taiwan. Since August 2001, licenses have been awarded to four undersea cable operators to engage in leased line services. Demand for high-speed data transmission services has been growing rapidly, as a result of growing consumer demand and lower tariffs due to increased competition. In particular, the total bandwidth of our lines leased increased by 111.2% in 2015.

The following table shows the bandwidth of international lines leased to third parties as of each of the dates indicated.

 

     As of December 31  
         2013              2014              2015      
     (in gigabits per second, or Gbps)  

Total bandwidth

     564.8         951.4         2,009.6   

Rental fees for international long distance leased line are generally based on transmission speed and distance.

We continue to experience a decline in rental fees for international leased lines, partly as a result of competition from other international leased line service providers. In response, we continue to implement marketing and service campaigns to retain our high-value corporate customers. Our international leased line services revenues were NT$1.4 billion, NT$1.5 billion and NT$1.7 billion (US$50.9 million) in 2013, 2014 and 2015, respectively, mainly due to our expansion to the overseas markets and growing consumer demand mentioned above.

International Data Services

Our international data services include international IP VPN services and Taiwan internet gateway services. Total revenues for international data services were NT$1.5 billion, NT$1.7 billion and NT$2.0 billion (US$59.5 million) for 2013, 2014 and 2015, respectively. Due to the growth of the number of Taiwanese corporations with operations outside of Taiwan, we expect demand for IP VPN and Taiwan internet gateway services to continue to increase and our revenues from our international data services to continue to grow.

Satellite Services

We entered into a contract with ST-2 Satellite Ventures Pte., Ltd. on March 12, 2010 to lease capacity on the ST-2 satellite. The lease term is 15 years starting from the official start of operations of the ST-2 satellite, and the total contract value is approximately NT$6.0 billion. This contract requires a prepayment of NT$3.1 billion, and the remaining amount will be paid annually. The ST-2 telecommunications satellite launched on May 21, 2011 and began commercial operation in August 2011. Please refer to Note 40 of our consolidated financial statements included elsewhere in this annual report for further details.

In addition, we have two satellite communication centers that enable us to provide TV broadcast, satellite VAS and backup systems for use in major emergencies. We also provide satellite services to Southeast Asia.

ICT and Other Services

Our ICT and other services in our international fixed communications business include corporate solution services. See “Emerging Services”.

Others

Our other business segment includes our non-telecom services, including property sales made by our subsidiary, Light Era Development Co., Ltd., or Light Era, and electronic products sales made by our subsidiary, Chunghwa Precision Test Tech Co., Ltd.

 

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Interconnection

We provide interconnection of our fixed line network and mobile network with other operators.

The following table sets forth our interconnection fee revenues and costs for the periods indicated. These revenues and costs are included, depending on the nature of the call made, in domestic fixed communications or mobile communications revenues and expenses, respectively.

 

    Year Ended December 31  
        2013             2014         2015  
    NT$     NT$     NT$     US$  
    (in billions)     (in millions)  

Interconnection fee revenues:

       

Fixed line

    1.2        1.1        1.0        29.0   

Mobile(1)

    6.0        4.8        3.7        113.9   

Interconnection costs:

       

Fixed line

    4.6        3.3        2.3        69.1   

Mobile

    6.2        4.9        3.9        119.1   

 

(1) We account for revenues from SMS air time charges under mobile VAS instead of interconnection for years. The table for the periods indicated uses accounting categorization described above.

The interconnection rate between fixed-line customers and other fixed-line customers is NT$0.32 per minute during peak times and NT$0.09 per minute during off-peak times. The interconnection rate for calls initiated by mobile customers to fixed-line customers is NT$0.4851 per minute during peak times and NT$0.2531 per minute during off-peak times.

The NCC has mandated mobile interconnection rate reduction over a period of four years starting on January 5, 2013. The rate should be reduced from NT$2.15 per minute to NT$1.15 per minute in four years with a CAGR of -14.5%. Therefore, our mobile interconnection revenues and costs decreased from 2013 to 2015.

Before January 1, 2011, the rates of telecommunication fees for telephone calls between fixed-line customers and mobile customers were set by the mobile network operators: mobile network operators collected such telecommunication fees from customers and paid the fixed-line network operators interconnection fees based on usage, regardless of which party of the interconnection initiated the call. Starting from January 1, 2011, the fixed-line network operators that initiate the call have the right to set the rates of telecommunication fees and to collect such fees from customers for fixed-line-to-mobile calls; fixed-line network operators have to pay interconnection fees to mobile network operators in accordance with the interconnection rate set forth by the NCC. In addition, to balance the competition between us, the market leader of fixed-line network operators, and other mobile network operators, we are also required by the NCC to pay transition fees (in addition to the interconnection fees) to the other mobile network operators for a period of six years starting from January 1, 2011. The transition fees will decrease gradually over the six-year period, and we will not be required to pay such transition fees from January 1, 2017.

Fixed interconnection costs decreased from 2013 to 2015 mainly due to (1) decreasing transition fees year over year, (2) reduction of mobile interconnection rate for fixed-line-to-mobile calls, and (3) decreasing traffic volume.

In accordance with governmental regulations, the contracts governing our interconnection arrangements must specifically address a number of prescribed issues. For example, our interconnection charge should reflect our costs with respect to the network elements used. In addition, cost increases are subject to approval by the regulatory authorities. We expect that our interconnection contracts will generally be reviewed annually, although we may also enter into long-term contracts. See “Regulation—Telecommunications Act—Interconnection Arrangements”.

 

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Emerging Services

We continue leveraging our advantages in network infrastructure, IDC, Content Delivery Network, or CDN, etc. to offer customized ICT total solutions to enterprise customers and to expand our ICT business. The revenues from our ICT business are classified in “ICT and Other Services” of each business segment. We are offering ICT total solutions by integrating our capabilities of cloud, information security, IoT and customization expertise. We are developing in-house Big Data capability for future commercialization as well as cooperating with partners to develop an IoT ecosystem across various industries.

Our ICT services includes integrated services such as our iEN, ITS, and Internet of Vehicles. Our iEN service helps companies and corporations implement energy-saving measures through computer-driven data analysis. Our ITS service provides navigation, real-time traffic information and infotainment through mobile devices for cars and drivers. By leveraging high speed 4G mobile broadband networks, we offer innovative Internet of Vehicles services including GPS, audio and video streaming, car information, etc. available for tablets. In addition to developing ICT businesses mentioned above, we also pursue ICT projects from both public and private sectors aiming to expand our revenue streams.

Marketing, Sales and Distribution

Marketing Strategy

In order to retain and expand our large customer base and to encourage our customers to increase their use of our services and products, we continue to focus our marketing strategy on the following areas.

 

    Services, Products and Bundled Offerings. We continually develop new VAS and products, and bundle our services and products based on different market segments, with the aim of increasing our high-usage customers and enhancing customer loyalty.

 

    Pricing and Promotions. We design flexible pricing packages that allow customers to select structures best tailored to their usage patterns, and design special promotional packages to encourage usage.

 

    Distribution Channels. We seek to facilitate customer subscription by adding more service points. In addition, we seek to broaden our distribution reach by strengthening our cross-industry alliances and marketing relationships. Furthermore, to expand our sales channels more effectively, we also implement an external sales agent system by collaborating with Senao, Synnex Technology International Corporation and Tsann Kuen Trans-Nation Group, which collaborations enable us to get closer to every customer.

 

    Business Customers. We expanded our customer focus to include small and medium-sized enterprises, or SME, in addition to large corporations. We seek to serve the needs of large corporate customers by devoting a project manager or project engineer to service these customers. These account managers are responsible for developing customized solutions and tariff packages to meet the specific needs of our customers. We continually update and expand our service offerings so that we can remain a one-stop telecommunications services provider to our corporate customers and provide for all of their telecommunications needs. Our dedicated local teams serve the needs of small and medium-sized enterprises. These teams also use our data bank to identify and target potential clients for promoting our e-commerce and mobile services. In addition, we help our corporate customers improve their efficiency and competitiveness by creating information systems for them.

 

    Advertising. We are committed to further strengthening the Chunghwa Telecom brand and image as well as strengthening and expanding market recognition of our specialized product brands, such as HiNet and emome. We plan to leverage our leading market position and status to strengthen the overall advantage of our product brands.

 

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Sales and Distribution

Our marketing department at our corporate headquarters in Taipei is responsible for central business planning and formulating our marketing strategies and objectives. We have multiple marketing departments for our various businesses which are responsible for business and marketing planning.

As of December 31, 2015, we also had 17 operations offices, 468 service centers, 268 Senao exclusive service stores and 6 customer service call centers located throughout Taiwan that are responsible for operations, sales and customer service in their respective local areas.

In January 2007, we acquired 31.33% equity ownership of Senao, a major distributor of mobile handsets in Taiwan. Senao has been listed on the TWSE under the number “2450” since May 2001. Our equity ownership in Senao decreased from 31.33% as of January 15, 2007 to 29.31% as of March 31, 2016, due to the exercise of options by employees that were previously granted before 2007, which decrease was partially offset by Senao purchasing its treasury stock in June and July of 2015. We consolidated the results of operations of Senao because we control four out of seven seats on the board of directors through the support of large beneficial shareholders of Senao. Please refer to Note 3 and Note 15 of our consolidated financial statements included elsewhere in this annual report for description about the control relationship between the parent company and Senao. Our investment in Senao enhanced our mobile handset distribution and sales capabilities. Starting from January 2014, customers can subscribe for our broadband service, MOD service and other services at Senao retail stores. See “Item 7. Major Stockholders and Related Party Transactions—B. Related Party Transactions” for a discussion of the agreement between the parent company and Senao about our business cooperation.

Customer Service and Billing

We believe our reputation for quality customer service has helped us attract new customers and maintain customer loyalty. We regularly survey our customers to improve our service and better understand market demand and customer preferences, and seek to develop products and services accordingly.

We provide the following services to our customers:

 

    bill payment services at 24-hour convenience stores, bank service counters, automatic teller machines, and service centers throughout Taiwan, via direct debit, over the phone, online at our website (www.cht.com.tw), on MOD, and on mobile handset emome or Hami;

 

    online information and bill payment services at our website (www.cht.com.tw) and customer service hotline for telephone payment;

 

    24-hour customer service and technical support through our service centers, call centers and website;

 

    free of charge itemized billing for international and domestic long distance calls; and

 

    consolidated and automated billing for all services, including English billing documents available upon request.

Network Infrastructure

Our network infrastructure consists of transmission networks that convey voice and data traffic, switching networks that route traffic between networks, and mobile, internet, leased line and data switching networks.

We purchase most of our network equipment from well-known international suppliers. As part of the purchase contract, these suppliers deliver and install the equipment for us. We also purchase from local suppliers a variety of components such as transmission lines, switches, telephone sets, MOD set-top boxes, and radio transmitters.

 

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Approximately 13,540 of our employees were engaged in network infrastructure development, maintenance, operation and planning as of December 31, 2015.

Transmission Networks

As of December 31, 2015, our transmission networks consisted of approximately 1.67 million fiber kilometers of fiber optic cable for trunking and approximately 8.49 million fiber kilometers of fiber optic cable for local loop.

Between 2009 and 2013, we deployed next generation synchronous digital hierarchy, or NG SDH, and optical cross connect, or OXC, equipment for providing TDM and data service. Due to the emergence of packet-transport network, or PTN, technology, which is a cost-effective method for transmitting packet-based data services, we began the deployment of PTN and stopped the deployment of NG SDH network in 2014. Between 2007 and 2014, we deployed 40/80-wavelength Re-configurable Optical Add-Drop Multiplexer, or ROADM, for backbone transmission network in order to provide new data services such as gigabit Ethernet, fiber channel, 2.5 gigabit and 10 gigabit packet over SDH and 10 gigabit Ethernet. Due to the high utilization of our existing ROADM network, we began to introduce the optical transport network, or OTN, trial network to meet the demand of 100G wavelength services in 2014. Between 2009 and 2013, we had already completed the deployment of 5,519 GbE OXC/NG SDH, which was stopped in 2014 due to the introduction of PTN. In addition, we had completed the deployment of 1,190 wavelength ROADM and 6,270 GbE PTN by the end of 2015. We will begin the large-scale deployment of OTN to meet demand for wavelength and sub-wavelength services in 2016.

As part of our strategic focuses on the internet and data markets, our local loop connections mainly adopt FTTx technology. This enables us to provide broadband services, such as MOD, high speed internet access and VPN. As of December 31, 2015, we have constructed approximately 6.92 million FTTx ports. Our FTTx service can offer high-speed broadband internet access rates up to 1 Gbps. For low bandwidth demand, we use ADSL technology to provide the internet connection services for the customers.

Switching Networks

Domestic telecommunications network. Our domestic public switched telephone network currently consists of 19 message areas connected by a long distance network. As of December 31, 2015, we had 38 long distance exchanges, which are interconnection points between our telecommunications network and approximately 17.1 million telephone lines, which reached virtually all homes and businesses in Taiwan.

We currently have intelligent networks installed over our public switched telephone networks for our domestic long distance and international networks, as well as a local intelligent network in the Taipei, Taichung and Kaohsiung metropolitan areas. Our intelligent network is designed to facilitate the use of VAS by providing more information about calls and allowing greater management of those calls.

As of December 31, 2015, our next generation network, or NGN core network capacity consisted of 1,160,000 local telephone subscribers, comprising 448,000 Session Initiation Protocol-based, or SIP-based, and 712,000 Access Gateway-based, or AG-based, subscribers.

Our NGN Managed IP backbone network consists of an inner core network and an outer core network. We owned high-speed NGN Managed IP backbone network by the end of 2015 with 12 sets of 4 Tbps switch routers for the inner core network and more than 34 sets of 1.6 Tbps switch routers for the outer core network. The bandwidth of the network is approximately 1,375 Gbps as of the end of 2015. We believe this network will enable us to meet the increasing demand for NGN services, such as VoIP, and all managed services, including MOD and VPN.

 

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International network. Our international transmission infrastructure consists of both submarine cable and satellite transmission systems, which link our national network directly to 97 telecommunications service providers in 43 international destinations.

International calls are routed between Taiwan and international destinations through one of our two international switching centers, one located in Taipei and the other in Kaohsiung. Each center had time-division multiplexing, or TDM, international gateway switches and NGN international gateway switch. We had a trunk capacity of 170,040 channels in total as of December 31, 2015.

As of December 31, 2015, we had invested in 19 submarine cables, nine of which land in Taiwan. We had increased the capacity of each of our current submarine cables, increasing our aggregate total capacity from 1,829 Gbps in 2014 to 2,245 Gbps in 2015.

Mobile Services Network

Our mobile services network consists of:

 

    cell sites, which are physical locations equipped with a base station consisting of transmitters, receivers and other equipment used to communicate through radio channels with customers’ mobile handsets within the range of a cell;

 

    BSC (base station controllers) for GSM or RNC (radio network controller) for 3G, which connect to, and control, the base station within each cell site;

 

    cellular switching service centers for GSM or 3G, which control the base station controllers and the processing and routing of telephone calls;

 

    GGSN (gateway GPRS support nodes), which connect our GPRS network to the internet;

 

    SGSN (serving GPRS support nodes), which connect the GPRS network to the base station controllers;

 

    MME (mobility management entity), which connects the base station to our 4G core network that is responsible for control side;

 

    S GW (Serving Gateway), which connects the base stations to our 4G core network that is responsible for data side;

 

    PDN GW (Packet Data Network Gateway), which connects our 4G core network to the internet; and

 

    transmission lines, which link (i) with respect to the GSM/3G/4G network, the mobile switching service centers, MME, S GW, base station controllers, base stations and the public switched telephone network, and (ii) with respect to the GPRS/4G core network, the base station controllers, the support nodes, PDN GW and the internet.

We provide 2G mobile services based on the GSM network standards. Prior to October 22, 2014, we had the 900 MHz and 1800 MHz frequency bands paired with spectrum of 15 MHz and 11.25 MHz, respectively, for our 2G mobile services and the licenses will expire in June 2017. Due to the gradual migration of the 2G subscribers to 3G and 4G, we returned the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014 and transferred the spectrum of 900 MHz frequency band to 4G mobile broadband license. Our usage right of the 900 MHz frequency band is changed from 15 MHz paired spectrum to 10 MHz paired spectrum since October 22, 2014, and the 10 MHz paired spectrum is shared by 2G GSM and 4G LTE networks adhering to the principle of technological neutrality of our 4G mobile broadband license. As of December 31, 2015, we had provided up to 99.9% population coverage on our GSM network. Since the launch of our 3G and 4G mobile services, we have gradually migrated GSM subscribers to 3G and 4G networks and have started to consolidate our GSM network. The number of our 2G subscribers has decreased from 2.6 million as of December 31, 2013, to 0.7 million as of December 31, 2015.

 

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We have 15 MHz paired spectrum in the 2 GHz frequency band for our 3G mobile services, which was launched in July 2005. We contracted with Nokia Solutions and Networks Oy to provide the core network, radio access network, service network, transmission network and maintenance network for our 3G network. To meet the high growth in mobile data traffic, we have upgraded our existing High-Speed Packet Access Network to Dual Cell High-Speed Packet Access Plus (DC HSPA+ with capability of 42 Mbps and 5.76 Mbps each for Down-link and Up-link).

We have 10 MHz paired spectrum in the 900 MHz frequency band and 25 MHz paired spectrum in the 1800 MHz frequency band for our 4G mobile broadband services, which were launched in May 2014. In December 2015, we obtained additional spectrum for 4G mobile broadband services of 30 MHz paired spectrum in the 2500 MHz and 2600 MHz frequency bands. We contracted with Nokia Solutions and Networks Oy and Ericsson Taiwan Ltd. to provide the radio access network, and Ericsson Taiwan Ltd. to provide the core network, respectively. In March 2016, we implement three frequency band CA technology into our 900/1800/2600 MHz frequency band base stations that is expected to increase users’ down-link speed over 300 Mbps.

We have also installed an intelligent network on our existing mobile services network infrastructure, which enable us to provide additional functions, such as prepaid and VPN services as well as a wide range of VAS.

Internet Network

HiNet, our internet service provider, has the largest internet access network in Taiwan, with 33 points of presence approximately 5,734,000 broadband remote access server ports and a backbone bandwidth of approximately 4,667 Gbps as of December 31, 2015. We aim to achieve HiNet’s points of presence and backbone bandwidth to approximately 5,617 Gbps by the end of 2016.

HiNet’s broadband backbone network consists of an inner core network and an outer core network. We had high-speed internet protocol backbone network by the end of 2015 with 16 sets of 12.8Tbps/7.04Tbps/4.48Tbps/4Tbps/1.6Tbps switch routers for the inner core network and more than 50 sets of 5.28Tbps/4Tbps/2.64Tbps/1.6Tbps/640Gbps switch routers for the outer core network. We believe this network will enable us to meet the increasing demand for our internet services.

HiNet’s total international connection bandwidth is 920 Gbps as of December 31, 2015. As we expect that internet traffic flows to and from the United States will continue to increase, we have been continuously expanding our bandwidth to the United States. We also endeavor to increase our links to other countries, including Japan, Korea, Hong Kong, Singapore, Mainland China, Malaysia and Thailand.

Leased Line and Data Switching Networks

We operate leased line networks on both a managed and unmanaged basis. In addition, we operate a number of switched digital networks used principally for the provision of packet-switched, frame relay, asynchronous transfer mode technology and a multi-protocol label switching internet protocol VPN. We have completed the construction of a digital cross connect system for provisioning and managing voice-grade data services throughout Taiwan with a total of 46 nodes. As of December 31, 2015, we had 344 frame relay ports, 922 asynchronous transfer mode ports and approximately 91,688 multi-protocol label switching internet protocol VPN virtual ports.

Our data networks support a variety of transmission technologies, including frame relay, asynchronous transfer mode and ethernet technology. We have also built up our HiLink VPN that combines internet protocol and asynchronous transfer mode technologies. The advantage of HiLink VPN based on multi-protocol label switching technology is that it can carry different classes of services, such as video, voice and data together to provide services with various qualities of service, high performance transmission and fast forward solution in an enhanced security network. HiLink VPN can be accessed by xDSL/FTTx/NG-SDH and can include built-in mechanisms that can deal with overlapping internet protocol addresses. Therefore, the network potentially is less costly and requires less management for business applications.

 

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Competition

We face competition in virtually all aspects of our business.

Domestic Fixed Communications

 

    Local and domestic long distance telephone services: Revenue from local and domestic long distance telephone service of telecommunication services providers has continuously decreased in the past few years primarily due to mobile and VoIP substitution. Competition from mobile data service providers increased significantly due to the popularity of smart mobile devices and mobile applications such as LINE and WeChat. Although there are other providers of fixed communications, including TWM Broadband, New Century Infocomm Tech. Co., Ltd. and APT, competition from these providers was not significant in the past few years.

 

    Leased line services: Major competitors in this field are four fixed line operators including TWM Broadband, New Century Infocomm Tech. Co., Ltd., APT and Taiwan Optical Platform Co., Ltd. We believe that the leased line services providers primarily compete on the basis of price and the bandwidth speed of services.

 

    Broadband internet access services: Major competitors in this field are five multiple-system operators, or MSOs, including Kbro Co., Ltd., China Network Systems Co., Ltd., TWM Broadband, Taiwan Broadband Communication Co., Ltd. and Taiwan Optical Platform Co., Ltd., and one fiber broadband service provider, namely Taiwan Intelligent Fiber Optic Network. With the increasing speed of mobile data service, we also face fierce competition from mobile data providers. We believe that the broadband internet access service providers primarily compete on the basis of price and the bandwidth speed of services.

 

    MOD services: Major competitors in this field include five cable TV MSOs and 28 independent MSOs. We believe that the different service providers compete on the basis of the multimedia content offered along with the ability to offer converged services by offering comprehensive solutions including data communications, voice communications and multimedia content.

Mobile Communications

There are five mobile operators in Taiwan, including Chunghwa Telecom, Taiwan Mobile, Far EasTone, Taiwan Star Telecom Corporation Ltd., or T-Star, and APT. All of these five operators won 4G mobile broadband licenses in the auction finalized in October 2013. In addition to the big three, T-Star and APT underwent mergers and acquisitions in order to compete in the market for 4G mobile broadband services. T-Star merged with VIBO Telecom Inc., a former 3G operator, in October 2014, while APT merged with Ambit Corporation, one of the 4G mobile broadband license winners, in December 2015, with APT as the surviving company. Each 4G mobile broadband network operator has been providing promotional programs to attract consumers, including unlimited data plans. In addition to the 2G, 3G and 4G mobile network operators discussed above, First International Telecom used to operate a personal handy-phone network but was declared bankrupt by the Taiwan Taipei District Court on December 26, 2014, and discontinued operations on March 31, 2015.

In addition to the mobile network operators, the NCC has issued a total of 14 3G mobile virtual network operator, or MVNO, licenses, which allow operators without a spectrum allocation to provide 3G mobile services by leasing the capacity and facilities of a mobile service network from a licensed mobile service provider. We are currently cooperating with Carrefour Telecom Co., Ltd. We may cooperate with other mobile virtual network operators in the future.

As of the end of 2015, there were no WiMAX service providers in Taiwan. The NCC has already recalled and released the 2500MHz and 2600MHz frequency band spectrum for 4G mobile broadband services through a bidding process in December 2015. We compete in the wireless services market primarily on the basis of premium brand, price, quality of service, network reliability and attractiveness of service packages.

 

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Internet

Our primary competitors in internet services are other internet services providers, including SeedNet and TWM Broadband. We compete in the internet services market primarily on the basis of price, technology, speed of transmission, amount of bandwidth available for use, network coverage and VAS.

International Fixed Communications

Our major competitors are TWM Broadband, New Century Infocomm Tech. Co., Ltd. and APT, which have provided fixed-line services since June 2001. These operators are primarily focused on international long distance services and corporate customer services, which typically generate higher revenue than residential customers. There have been four submarine cable services licenses granted since August 2001. These submarine cable operators have begun offering international leased line services to other fixed-line operators, internet service providers and ISR operators.

Our international long distance services compete with international long distance resale services and VoIP services such as those provided by Line and Skype.

Cybersecurity and Personal Information Protection

To prevent increasing cyber risks and threats, we have implemented the measures described below.

 

    We have built an online service system that enables Certificate Authority’s Secure Socket Layer functions that performs as a secure tunnel to transmit encrypted customer’s information. In addition, we offered the Global Trust Secure Site Seal to prevent from phishing attacks on payment web sites.

 

    The high-availability systems in our data centers deploy firewall and Intrusion Prevention System, or IPS, to defend against hackers’ attacks.

 

    All information systems and websites are scanned for vulnerabilities and a team of information security experts is responsible for conducting penetration testing on our information system, websites and Apps, to prevent leakage of customer information.

 

    We have enhanced the firewall policy and adopted minimum principle to limit the IPs and ports access control, in order to reduce intrusion risk from hackers.

 

    We have enhanced our system access controls including, among other measures, by using two-factor authentication and by limiting daily operational access to dedicated terminals in a separate network.

 

    We have enhanced the retention and monitoring for all system, database, and applications logs as an additional information security measure and our managers review system logs and inquiry records on a daily basis.

 

    We required our branch offices to comply with ISO27001 and obtain the ISO27001 certification.

 

    We established CHT Security Operation Center, or SOC, which is responsible for incidents and threats monitoring, notification and emergency response.

The amendment of the Personal Information Protection Act, or PIPA, became fully effective on October 1, 2012, except for its Articles 6 and 54 that await further determination by the Executive Yuan. PIPA applies to all individuals, legal entities and enterprises that collect, process and use personal information, and has a significant impact on the banking and service industries in Taiwan. Due to the adoption of PIPA, the level of responsibility and liability on personal information protection of a company was raised. We have conducted inventory checks of personal information that we currently hold, established standard operating procedures, or SOP, to comply with the requirements under PIPA, and have taken information security measures to protect the data.

 

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To comply with the PIPA, we implemented a series of measures to avoid the leakage of customers’ information:

 

    Personal information protection policies and regulations are defined in the operational rules of all of our business and service contracts.

 

    According to our personal data safety and awareness plan, all of our employees are required to take training programs and to pass the awareness test at least twice per year.

 

    We required our branch offices to implement a drill in personal data leakage incident handling once a year.

 

    Our auditing department completes an annual audit plan and regularly audits information circulation in each department on customer information management and protection.

 

    We enforced customer service center and call center to comply with BS10012 and obtain the BS10012 certification.

 

    Documents containing customer’s personal information are labeled “highly confidential”.

Property, plant and equipment

Our property, plant and equipment consist mainly of telecommunications equipment, land and buildings located throughout Taiwan. Although we have a significant amount of land and buildings throughout Taiwan, most of our properties are for operational use and only a small part of them are for investment purposes, which were classified as “investment properties” in our consolidated financial statements included in this annual report. Notes 17 and 18 to our consolidated financial statements, included elsewhere in this annual report, provide additional details as to our “Property, plant and equipment” and “Investment properties”, respectively. See “Item 3. Key Information—D. Risk Factors—Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks, earthquakes or other natural disasters” for a discussion of environmental issues that may affect utilization of our assets.

Our property development subsidiary, Light Era, acquired land located near the high speed rail station in Taoyuan in October 2012. This property, which was classified as “inventories” in our consolidated financial statements included in this annual report, will be used to develop intelligent homes, in which our fiber broadband and ICT services, such as energy saving technologies, will be deployed. See Note 12 to our consolidated financial statements, included elsewhere in this annual report, for additional details regarding our inventories.

We are now focusing more on rental income and will continue seeking development opportunities from the ROC central and local government urban planning programs to increase the value of our land, buildings and equipment. We have received approximately NT$609.7 million (US$18.6 million) in rental income from properties in 2015.

Insurance

We do not carry comprehensive insurance for our properties or any insurance for business disruptions. We do, however, maintain in-transit insurance for key materials, such as cables, equipment and equipment components. We do not carry insurance for the ST-2 satellite since we only lease capacity for our operations instead of owning the satellite.

Employees

Please refer to “Item 6. Directors, Senior Management and Employees—D. Employees” for a discussion of our employees.

 

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Our Pension Plans

Currently, we offer two types of employee retirement plans—our defined contributions plan and defined benefits plan—which are administered in accordance with the Republic of China Labor Standards Act and the Republic of China Labor Pension Act.

Legal Proceedings

From time to time, we are involved in various legal and arbitration proceedings of a nature considered to be in the ordinary course of our business. It is our policy to provide for reserves related to these legal matters when it is probable that a liability has been incurred and the amount is reasonably estimable. From time to time, we have also been assessed fines by various government agencies such as the NCC and FTC, but none of these fines have had a significant effect on our financial condition or results of operations.

Except as disclosed in our annual report, we believe that we have not been involved in any legal or arbitration proceedings during 2013, 2014 or 2015 that would have a significant effect on our financial condition or results of operations; however, we cannot give you any assurance with respect to the ultimate outcome of any asserted claims against us or legal or arbitration proceedings involving us.

Capital Expenditures

See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital expenditures.

Enforceability of Judgments in Taiwan

We are a company limited by shares and incorporated under the ROC Company Act. All of our directors, executive officers and some of the experts named in this annual report are residents of Taiwan and a substantial portion of our assets and the assets of those persons are located in Taiwan. As a result, it may not be possible for investors to effect service of process upon us or those persons outside of Taiwan, or to enforce against them judgments obtained in courts outside of Taiwan. We have been advised by our ROC counsel that in their opinion any final judgment obtained against us in any court other than the courts of the ROC in connection with any legal suit or proceeding arising out of or relating to the ADSs will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that:

 

    the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;

 

    the judgment and the court procedure resulting in the judgment are not contrary to the public order or good morals of the ROC;

 

    if the judgment was rendered by default by the court rendering the judgment, we, or the above mentioned persons, were duly served within a reasonable period of time in accordance with the laws and regulations of the jurisdiction of the court or process was served on us with judicial assistance of the ROC; and

 

    judgments at the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis.

A party seeking to enforce a foreign judgment in the ROC would be required to obtain foreign exchange approval from the Central Bank of the ROC (Taiwan) for the payment out of Taiwan of any amounts recovered in connection with the judgment denominated in a currency other than NT dollars if a conversion from NT dollars to a foreign currency is involved.

 

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Regulation

Overview

We were subject to the Statute of Chunghwa Telecom Co., Ltd. prior to our privatization. Although we have been privatized since August 2005, the Statute of Chunghwa Telecom Co., Ltd. was still effective until December 24, 2014. The Legislative Yuan approved the abolishment of the Statute of Chunghwa Telecom Co., Ltd. on December 9, 2014, and the President of the ROC approved the abolishment of Statute of Chunghwa Telecom Co., Ltd. effective from December 24, 2014. The abolishment of the Statute of Chunghwa Telecom Co., Ltd. did not and will not have any material impact on our company.

Regulatory Authorities

Prior to March 1, 2006, we were under the supervision of the MOTC and the Directorate General of Telecommunications. On March 1, 2006, the NCC was formed in accordance with the Organization Act, which was intended to transfer regulatory authority over the Taiwan telecommunications industry from the MOTC and the Directorate General of Telecommunications to the NCC. The NCC was comprised of nine commissioners who were recommended by the government and opposition political parties in the Legislative Yuan, as well as recommended by the Executive Yuan and approved by the Legislative Yuan. However, the Executive Yuan considered the composition of the NCC unconstitutional and petitioned the Grand Justices of the ROC, or the Grand Justices, to interpret the constitutionality of the formation of the NCC and the procedure for nominating commissioners to serve on the NCC. On July 21, 2006, the Grand Justices rendered an interpretation and held that the relevant provisions under the Organization Act as to the nomination procedures for the commissioners of the NCC were unconstitutional. However, the Grand Justices granted a grace period allowing such provisions of the Organization Act to remain in effect until December 31, 2008.

On January 9, 2008, an announcement issued by the President amended the Organization Act, or New Amendment, amending the unconstitutional formation articles and reducing the total number of commissioners to seven with a term of four years, but three of the Commissioners appointed after the New Amendment served a term of two years. The commissioners will be nominated by the premier of the Executive Yuan and approved and appointed by the Legislative Yuan.

The new nomination method under the New Amendment became effective on February 1, 2008. The nine incumbent Commissioners continued to serve until July 31, 2008, when their terms ended. The premier of the Executive Yuan nominated seven Commissioners on July 1, 2008, and they were approved and appointed by the Legislative Yuan on July 18, 2008. The new Commissioners took office on August 1, 2008. Thereafter, upon the resignation of one Commissioner and the expiry of the term for the three Commissioners, four new Commissioners were nominated by the premier of the Executive Yuan, approved and appointed by the Legislative Yuan and began serving as Commissioners on August 1, 2010.

The Organization Act was further amended on December 28, 2011. The amendment stipulates that the premier of the Executive Yuan shall appoint one Commissioner to serve as Chairperson, and one as Vice Chairperson upon nomination of the seven Commissioners. Accordingly, the Chairperson and the Vice Chairperson were nominated by the premier of the Executive Yuan on April 30, 2012, approved and appointed by the Legislative Yuan and began tenure as Commissioners on August 1, 2012. Upon the resignation of one commissioner and the expiry of the term for two Commissioners, three new Commissioners were nominated by the premier of the Executive Yuan, approved and appointed by the Legislative Yuan and began serving as Commissioners on August 1, 2014.

In accordance with the Organization Act, the NCC is responsible for:

 

    formulating, implementing and interpreting telecommunications laws and regulations;

 

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    issuing telecommunications licenses and regulating the operation of telecommunications industry participants;

 

    assessing and testing telecommunication systems and equipment;

 

    drafting and promulgating technical standards for telecommunications and broadcasting;

 

    classifying and censoring the contents of telecommunications and broadcasting;

 

    managing telecommunications and media resources in Taiwan;

 

    maintaining competition order in the telecommunication and broadcasting industries;

 

    governing technical standards in connection with the safety of information communications;

 

    managing and facilitating the resolution of disputes pertaining to the Taiwan telecommunications and broadcasting industries;

 

    managing offshore matters relating to Taiwan’s telecommunications and broadcasting industries including matters of international cooperation;

 

    managing funds allocated for the development of Taiwan’s telecommunications and broadcasting industries;

 

    monitoring, investigating and determining matters in relating to Taiwan’s telecommunications and broadcasting industries;

 

    enforcing restrictions under telecommunications and broadcasting laws and punishing violators; and

 

    supervising other matters in relation to communications and media.

Telecommunications Act

The Telecommunications Act and the regulations under the Telecommunications Act establish the framework and govern the various aspects of the Taiwan telecommunications industry, including:

 

    licensing of telecommunications services;

 

    telecommunication numbers;

 

    restrictions on dominant telecommunications service providers;

 

    tariff control and price cap regulation;

 

    accounting separation system;

 

    interconnection arrangements;

 

    bottleneck facilities;

 

    spectrum allocation;

 

    provision of universal services;

 

    equal access;

 

    number portability;

 

    local loop unbundling;

 

    co-location; and

 

    ownership limitations.

 

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Each of these aspects is described below. The Telecommunications Act also establishes a non-auction pricing system for assignment of radio frequencies.

Licensing of Telecommunications Services

Type I and Type II Service Providers

Under the Telecommunications Act, telecommunications service providers are classified into two categories:

Type I. Type I service providers are providers that install network infrastructure, such as network transmission, switching and auxiliary equipment for the provision of telecommunications services. Type I services include fixed-line services such as local, domestic long distance and international long distance services, as well as interconnection, leased line, ADSL and satellite services and wireless services such as mobile, including mobile data and trunked radio services.

Type II. Type II service providers are defined as all telecommunications service providers other than Type I service providers. Type II services are divided into special services and general services. Special services include simple voice resale, E.164 internet telephony service, Non-E.164 internet telephony service, international telecommunications services that provide to unspecific customers by leasing international circuit and other services specified by the MOTC before March 1, 2006 or by the NCC from March 1, 2006. General services include any Type II service other than special services.

Until 1996, we were the sole provider of Type I services in Taiwan. In 1996, the government opened the market for mobile, paging and trunked radio, mobile data and digital low power cordless telephone services. In 1998, the government opened the market for fixed-line and mobile satellite services. In June 2001, the government granted licenses to three operators for establishing fixed-line services, thereby opening the market for fixed-line services. Since August 2000, the government has permitted four undersea cable operators to engage in the undersea cable leased-circuit business.

Commencing in 2007, the NCC began accepting applications for licenses to provide fixed-line services in March, June, September and December of each year. The NCC started to accept applications for fixed-line services on a daily basis beginning in 2008. There is no limit on the number of fixed-line licenses that they may decide to issue.

Granting of Licenses

Type I

Type I service providers are more closely regulated than Type II service providers. The government has broad powers to limit the number of providers and their business scope and to ensure that they meet their facilities roll-out obligations. Under the Telecommunications Act, Type I service providers are subject to pre-licensing merit review of their business plans and tariff rates.

Before March 1, 2006, licenses for Type I services were granted by the MOTC through a three-step procedure. Applicants obtained a concession from the MOTC. After obtaining a concession, the applicant obtained a network construction permit and an assignment of spectrum, in the case of mobile telephone services and satellite services, from the Directorate General of Telecommunications or the MOTC prior to applying for a license. Upon completion of construction of its network and review by the Directorate General of Telecommunications, the applicant was granted a Type I license. The MOTC had the authority to grant Type I licenses for each of fixed-line services, wireless services and satellite services. Type I licenses have different minimum paid-in capital requirements for applicants and varying durations depending on the particular type of service.

 

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Since March 1, 2006, the same procedure applies except that the licenses are granted by the NCC.

The Telecommunications Act further authorizes the competent authority, now the NCC, to promulgate separate regulations governing each Type I service, including the business scope of the Type I service provider, as well as the procedures and conditions for granting special permits and the length of the period of the special permits of each Type I service. Each holder of a Type I license will pay a fee ranging from 0.5% to 2% of their annual revenues or their bid price ratio (Article 2 of the Type I Service Provider Special Tariff Standards) multiplied by their annual revenues generated from the particular Type I service for which a license has been granted.

Fixed Line Services. Under the Telecommunications Act, the Regulations for Administration on Fixed Network Telecommunications Business govern the issuance of fixed-line service licenses and the business scope of fixed-line providers. Fixed-line service licenses are subdivided into the following categories, and we conduct our fixed line services with a license for integrated services.

 

    integrated services, including local, domestic long distance and international long distance telephone services;

 

    local telephone services;

 

    domestic long distance telephone services;

 

    international long distance telephone services; and

 

    local, domestic long distance and international long distance leased line services.

Licenses for local telephone and integrated services are valid for 25 years. Licenses for domestic long distance and international long distance telephone services are valid for 20 years. Licenses for leased line services are valid for 15 years. If the service provider wishes to continue operating, the service provider needs to apply for a license renewal to the NCC between nine months and six months before the expiration of their license. The minimum paid-in capital requirements for integrated services providers that applied for a license before June 30, 2004, between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$21 billion, NT$8.4 billion and NT$6.4 billion, respectively. The minimum paid-in capital requirements for both domestic and international long distance telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$1.05 billion and NT$800 million, respectively. The minimum paid-in capital requirements for international undersea leased cable service providers that applied for a license before June 30, 2004, between July 1, 2004 and January 31, 2008, between February 1, 2008 and June 30, 2013 and on or after July 1, 2013 are NT$420 million, NT$420 million, NT$320 million, and NT$300 million, respectively. The minimum paid-in capital requirement for local telephone service providers that applied for a license between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 are NT$6.3 billion and NT$4.8 billion, respectively, multiplied by the Local Network Operation Weights for the regions in which local network managerial rights have been granted to the service provider. The Local Network Operation Weights are calculated as the population of the region as a proportion of the entire population of Taiwan and are announced by the competent authority every three years. If an applicant for a license is also a Type I service provider, it will need to combine the minimum paid-in-capital requirements for all relevant services.

In March 2000, the government granted three new concessions to fixed-line services providers for integrated services. Recipients of these concessions are required to apply for a network construction permit to deploy broadband local access networks. Each recipient of these concessions is required to have capacity for 150,000 customers before it is able to apply for a fixed-line license to launch its proposed services. The three fixed-line service providers have since obtained fixed-line licenses and are required to achieve capacity for one million customers by the sixth year following the date of the grant of the network construction permit awarded. Operators that applied for integrated service provider licenses before June 30, 2004, between July 1, 2004 and January 31, 2008 and on or after February 1, 2008 must achieve a capacity for 1.0 million, 0.4 million and 0.3 million customers, ports or a combination of both, respectively, by the fourth year following the date of the grant of the network construction permit.

 

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Wireless Services. Under the Telecommunications Act, the Regulations for Administration of Mobile Communications Business promulgated by the MOTC before March 1, 2006 or by the NCC from March 1, 2006 continue to govern the issuance of wireless services licenses and the business scope of wireless service providers. Wireless service licenses are subdivided into the following categories:

 

    mobile services;

 

    paging services;

 

    mobile data services;

 

    digital low-power cordless telephone services; and

 

    trunked radio services.

Wireless service licenses are granted to both regional and national service providers through review and bidding procedures.

The wireless service license for mobile or paging service, once granted, should be valid for a term of 15 years starting from the date when such license is granted, and licenses for mobile data, digital low-power cordless telephone and trunked radio are valid for 10 years starting from the date when such license is granted. According to the Regulations for Administration of Mobile Communications Businesses amended by the NCC on September 19, 2011, the wireless service provider may file an application with the NCC for extension of the valid term of its license for providing mobile or paging service one year prior to the expiry of the 15-year valid term. Once the NCC approves the application, the valid term of the wireless service license for mobile or paging service will be extended to June 30, 2017. The valid terms of our licenses granted by the ROC government authorities for providing 2G mobile services on the 900MHz and 1800MHz spectrum expired in 2012 and 2013 respectively. We filed the application with the NCC for extending the valid terms of our 2G licenses on November 29, 2011. Our application was approved by the NCC in November 2012 and the terms of our licenses for providing 2G mobile services on the 900MHz and 1800MHz spectrum should be valid until June 2017. See “Item 4. Information on the Company—B. Business Overview—Network Infrastructure—Mobile Services Network” for the discussion of our early return of the 2G license in the 900 MHz frequency band to the NCC on October 22, 2014.

The minimum paid-in capital requirements for different mobile communication businesses are as follows: Digital Low-Power Wireless Telephone Business, NT$200 million; Trunking Wireless Telephone Business, NT$20 million for regional operation and NT$60 million for island-wide operation; Mobile Data Communication Business, NT$50 million for regional operation and NT$150 million for island-wide operation; Radio Paging Business, NT$200 million for regional operation and NT$400 million for island-wide operation; Mobile Telephone Business, NT$2 billion for regional operation and NT$6 billion for island-wide operation. If one single applicant acquires operational licenses of two or more businesses with minimum paid-in capital requirements, the paid-in capital for the businesses should be calculated and collected by the applicant separately.

For an operator who obtains the permission of operation over two businesses through the legal procedure, its minimum paid-in capital shall be separately calculated upon approval for establishment, if such other businesses are subject to the minimum paid-in capital restriction.

Third Generation Mobile Services. The MOTC promulgated the Regulations for Administration of the Third Generation Mobile Communications Business on October 15, 2001. The NCC amended the above regulations on July 5, 2007, designating itself as the authority in charge of the third generation, or 3G, mobile services regulations and further amended such regulations on December 30, 2008 for the establishment of base stations. The regulations govern voice and non-voice telecommunications services provided using the spectrum assigned by the MOTC, and now governed by the NCC, that utilizes the IMT-2000 technical standards as

 

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announced by the International Telecommunications Union. Licenses for 3G mobile services were granted by the MOTC and are now granted by the NCC. We have received our 3G mobile services license, which is valid from May 26, 2005 to December 31, 2018.

Under the Regulations for Administration of the Third Generation Mobile Communications Business, the operation area of this business is the whole nation; the minimal paid-in capital for operating this business shall be NT$6 billion. If the applicant operates another business of a Type I telecommunications enterprise at the same time and there is a restriction on the paid-in capital to the other business, after acquiring the establishment approval, the required minimal paid-in capital shall be calculated by aggregating the minimal requirement of each service.

Mobile Broadband Services. Pursuant to the Regulations for Administration of Mobile Broadband Businesses, the 4G mobile broadband service providers must obtain the concession license issued by the NCC before providing 4G mobile broadband services. The license granted for the application in 2013 is valid from the license issue date until December 31, 2030 and the license granted for the application in 2015 is valid from the license issue date until December 31, 2033. The operation area of 4G mobile broadband services covers throughout the ROC.

The minimum paid-in capital for operating the mobile broadband services is NT$6 billion. If an applicant also operates another business of Type I telecommunications enterprise, the minimal paid-in capital required for operating the mobile broadband services and the other Type I telecommunications services shall be determined by aggregating the paid-in capital of the entity required for operating the mobile broadband services and that of the entity required for operating the other Type I telecommunications services.

The mobile broadband services license was released for the first time in 2013. We received the 4G mobile broadband services license on April 30, 2014, and launched the services on May 29, 2014. Mobile broadband services licenses were released for bidding for a second time in 2015, and we were declared the winning bidder on December 7, 2015. After the revision of our 2500MHz and 2600MHz business plan was approved by the NCC on January 27, 2016, we received a permit for establishment by the NCC on February 17, 2016, in accordance with such business plan, and now we are accelerating the deployment of 4G base stations with these frequency bands. We received the license to operate these frequency bands on March 23, 2016, and put these frequency bands into use on March 24, 2016.

Satellite Services. Under the Telecommunications Act, the Regulations for Administration on Satellite Communication Services promulgated by the MOTC govern the issuance of satellite services licenses and the business scope of satellite service providers. The NCC amended the above regulations on July 20, 2007, designating itself as the authority in charge of the Satellite Regulations. Satellite services licenses are subdivided into fixed satellite services licenses and mobile satellite services licenses.

The satellite services license should be valid for a term of 10 years starting from the date when such license is granted. If the service provider wants to re-new its satellite services license before the expiry of the 10-year term, such service provider needs to file a renew application with the NCC within the period from 9 months to 6 months before the expiry date of the original satellite license. The valid term of the renewed satellite license will be 10 years. Minimum paid-in capital requirements for fixed satellite service providers and mobile satellite service providers are NT$100 million and NT$500 million, respectively. If an applicant applies to operate fixed satellite services and mobile satellite services at the same time, its minimum paid-in capital should be calculated separately. The same also applies to an applicant who operates another business of Type I telecommunications enterprise at the same time.

We currently hold a fixed satellite services license, valid from December 10, 2008 to December 9, 2018.

 

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Type II

The Telecommunications Act was amended in 1996 to open the market for all Type II services. Under the Regulations for Administration on Type II Telecommunications Business, Type II services are divided into special services and general services. Special services include simple resale, network telephone service of E.164 and non-E.164 user numbers (VoIP), international leased circuit and other services specified by governing authority. General services include any Type II service other than special services. The policy for granting a Type II service license is as follows:

 

    there is no limit on the number of licenses to be issued;

 

    licenses were granted by the Directorate General of Telecommunications before March 1, 2006 and are now granted by the NCC; and

 

    no bidding procedure is required.

We hold a license to operate all Type II services. Type II service licenses issued before November 15, 2005 are valid for ten years and may be renewed by submitting an application within two months prior to the expiration date. Type II service licenses issued or renewed on or after November 15, 2005 are valid for three years and may be renewed during the period commencing two months prior to the expiration date. There is no minimum paid-in capital requirement for Type II service providers. Our license to operate Type II services is included in our license to operate integrated services, and is valid from July 29, 2000 to July 28, 2025.

Under the Type II Telecommunications Enterprise Permit Fee Schedule, operators of simple resale or network telephone services of E.164 or non-E.164 user numbers must pay an annual license fee equal to 1% of annual revenues generated from these services during the previous year. Type II service operators providing services other than simple resale or network telephone services of E.164 or non-E.164 user numbers must pay license fees ranging from NT$6,000 to NT$150,000 depending on their respective paid-in capital. For operators who operate over two or more businesses, their license fee shall be separately calculated but jointly collected. These regulations do not apply to integrated services providers who are permitted to provide Type II services without additional Type II Licenses.

Telecommunications Numbers

According to the Telecommunications Act, numbering codes, subscriber numbers, identification numbers and other telecommunication numbers will be distributed and managed by the NCC. These telecommunication numbers may not be used or changed without approval by the NCC. In order to maintain effective use of available telecommunication numbers, the Telecommunications Act empowers the NCC to reallocate and retrieve assigned telecommunication numbers and to collect a usage fee for distributed telecommunication numbers. According to the Regulations for Usage Fees of Specific Telecommunications Numbers, telecommunications service providers have to pay 70% of revenues collected from the auctioning off and selection of “golden numbers” and the standard usage rates for “special identification numbers” in use.

Restrictions on Dominant Telecommunications Services Providers

Under the Telecommunications Act, the regulations governing dominant telecommunications services providers apply only to Type I service providers. A Type I service provider is deemed to be dominant if it meets any of the following criteria and was declared by the MOTC or now the NCC as dominant:

 

    controls key basic telecommunications infrastructure;

 

    has dominant power over market price; or

 

    has more than a 25% market share in terms of customers or revenues.

 

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We have been declared by the former competent authority MOTC as a dominant Type I service provider for fixed-line and GSM mobile services. On July 7, 2012, we have been classified as a dominant Type I service provider for 3G mobile services by the NCC. Under the Telecommunications Act, a dominant Type I service provider must not engage in the following activities:

 

    directly or indirectly hinder a request for interconnection with its proprietary technology by other Type I service providers;

 

    refuse to release to other Type I service providers the calculation methods of its interconnection fees and other relevant materials;

 

    improperly determine, maintain or change its tariffs or means of services;

 

    reject, without due cause, a request for leasing network components by other Type I service providers;

 

    reject, without due cause, a request for leasing lines by other service providers or customers;

 

    reject, without due cause, a request for negotiation or testing by other service providers or customers;

 

    reject, without due cause, a request for negotiation for co-location by other service providers;

 

    discriminate, without due cause, against other service providers or customers; or

 

    abuse its position as a dominant provider, or engage in other unfair competition activities as determined by the regulatory authorities.

In addition, a dominant Type I service provider is subject to special regulations limiting its tariff changes.

Tariff Control and Price Cap Regulation

In order to promote competition in the telecommunications market, and as part of the government’s overall policy toward deregulation, the Telecommunications Act was amended in 1999 to abolish the former rate of return system on tariff setting in favor of price cap regulation of Type I services.

Under the Administrative Regulation Governing Tariffs of Type I Telecommunications Enterprises, a dominant Type I service provider must submit its proposed adjustment in primary tariffs and promotional packages including primary tariffs to the NCC for approval at least 14 days prior to the date of the proposed tariff changes and announce such change on media, website and business locations on the day after the NCC grants the approval. The tariff change will come into effect seven days after the announcement.

Primary tariffs include:

 

    for fixed line local telephone services: monthly fees, usage fees, monthly rental fees of leased lines, pay telephone usage fees and internet connection service fees;

 

    for fixed line domestic long distance telephone services: monthly rental fees of leased lines;

 

    for fixed line international long distance telephone services: leased line monthly rental fees;

 

    for wireless services, including 3G mobile services: monthly rental fees and the prepaid communication charges;

 

    the wholesale price enacted in accordance with this regulation; and

 

    other fees or tariffs announced by the NCC.

In addition, a dominant Type I service provider is required to set wholesale prices for the provision of its telecommunication services to other telecommunications enterprises. Factors affecting the determination and adjustments of the wholesale price include the establishment, change, cancellation and connection fees. These telecommunication services and their suitable targets, all of which are subject to annual reviews by the NCC, include:

 

    interface circuits (local and long distance) between internet access service providers and customers for Type I and Type II service providers;

 

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    interface circuits (local and long distance) between internet access service providers for Type I and Type II service providers that are internet access service providers;

 

    interconnection circuits between Type I service providers and between Type I and Type II service providers of international simple resale, or ISR, and E.164 VoIP services;

 

    DSL-family (xDSL) circuits for fixed line service providers and internet service providers;

 

    other local and long distance data circuits for Type I and Type II service providers; and

 

    broadband internet interconnection for Type I and Type II service providers that are internet access service providers.

The initial wholesale prices set by a dominant Type I service provider may be the retail price less fees and expenses which need not be incurred, but shall not be higher than its promotional pricing. Changes in the wholesale price charged by a dominant Type I service provider may not be greater than (i) the retail price less fees and expenses which need not to be incurred but not greater than the promotional pricing; or (ii) the annual growth rate of the consumer price index in Taiwan minus the constant set by the NCC, whichever is the lower. The Administrative Regulations Governing Tariffs of Type I Telecommunications Enterprises further prohibits a dominant Type I service provider from practicing unfair competition against other telecommunications enterprises.

In addition, changes in tariffs charged by dominant Type 1 service providers (notwithstanding the type of their respective services) may not, in any event, be greater than the annual growth rate of the consumer price index in Taiwan adjusted by a set constant, which will be periodically determined and announced by the NCC. For example, if:

 

    the annual growth rate of the consumer price index in Taiwan minus the set constant is positive, the increased percentage of tariffs must not exceed such positive figure;

 

    the annual growth rate of the consumer price index in Taiwan minus the set constant is negative, the decreased percentage of tariffs must be at least the absolute value of such negative figure, and the tariffs used in the given year must not be higher than the decreased tariff; and

 

    the annual growth rate of the consumer price index in Taiwan minus the set constant equals to zero, no increase in tariffs is allowed to be made by any Type I service providers.

On January 29, 2010, the NCC announced that effective from April 1, 2010 to March 31, 2013:

 

    the set constant to be applied to the tariff adjustment for the fixed line integrated services is 4.816% and covers the following:

 

    dominant providers of fixed line services

 

    tariffs of the following:

 

    the monthly fee for ADSL leased line and the usage fee for domestic long distance telephone services (excluding public pay phones)

 

    wholesale prices of the following:

 

    the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers

 

    the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider

 

   

the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1

 

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telecommunication service provider; the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers

 

    the monthly fee for other local and domestic long distance leased lines

 

    the interconnection fee for internet bandwidth interconnection

 

    no set constant to be applied to the call charges for the domestic fixed communication services during the following periods:

 

    the integrated services operators and the domestic telephone services operators can determine the tariff adjustment for the domestic telephone services during the specific period and seek NCC’s approval or recognition

 

    the specific periods include 11:00 p.m. to 8:00 a.m. from Monday to Friday, 12:00 a.m. Saturday to 8.00 a.m. Monday, and the entire day of a national holiday

 

    the set constant to be applied to the tariff adjustment for the mobile services and the 3G mobile services is 5% and covers the following:

 

    2G mobile service and 3G mobile service operators

 

    tariffs of the following:

 

    domestic short messaging services

 

    calls made from a 2G mobile service customer or from a 3G service network to a domestic fixed communication network

 

    calls made from a 2G mobile service customer or from a 3G service network to a 2G mobile service network, a 3G mobile service network, a 1900MHz Digital Low-Tier Cordless Telephone Service, or PHS, or WiMAX services

 

    the set constant to be applied to the cellular voice access charge will be announced separately after the amendment to the relevant regulations.

 

    the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan.

On February 7, 2013, the NCC announced that effective from April 1, 2013 to March 31, 2017:

 

    the set constant to be applied to the tariff adjustment for the fixed line integrated services is 5.1749% and covers the following:

 

    dominant providers of local network services and long-distance network services in Type I service

 

    tariffs of the following:

 

    the monthly fee for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB)

 

    wholesale prices of the following:

 

    the monthly fee for leased lines services (including local and domestic long distance leased lines) between internet service providers and their customers

 

    the monthly fee for leased lines services (including local and domestic long distance leased lines) between an internet service provider and another internet service provider

 

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    the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and another Type 1 telecommunication service provider; the monthly fee for the interconnection (including local and domestic long distance lines) between a Type 1 telecommunication service provider and a Type 2 telecommunication service provider who provides simple resale and network telephone service of E.164 user numbers

 

    the monthly fee for other local and domestic long distance leased lines

 

    the interconnection fee for internet bandwidth interconnection

 

    the set constant to be applied to the tariff adjustment for other Type 1 telecommunication services is the annual growth rate of the consumer price index in Taiwan, no increase in tariffs is allowed.

In comparison, all non-dominant Type I service providers are only required to fully disclose and notify the public of their proposed tariff adjustments and promotional packages, through the media, websites, and at all business premises, in an appropriate manner, and to report to the NCC prior to the date of the proposed tariff change, with respect to all tariffs.

Type II service providers are free to establish their own tariff schemes, but are required to notify the NCC and the public upon adoption and upon any subsequent adjustments.

Accounting Separation System

The Telecommunications Act requires that a Type I service provider, including one who concurrently offers Type II services, separately calculate the profits and losses for its different services and prohibits any cross-subsidization among services that will impede fair competition.

Interconnection Arrangements

The Telecommunications Act requires all Type I service providers to allow other Type I service providers access to their networks. It further requires Type I service providers, within three months upon request by the other Type I service provider, to reach an agreement on the relevant terms for the interconnection. Prices charged for interconnection must be based on cost. If the parties fail to reach an agreement within three months, the NCC may, either at the request of the parties or on its own accord, arbitrates and determines the interconnection terms for the parties. The Telecommunications Act authorizes the Directorate General of Telecommunications or, from March 1, 2006, the NCC to issue rules and regulations pertaining to interconnection.

The Regulations Governing Network Interconnection among Telecommunications Enterprises establishes the basis for determining the interconnection charge of a dominant Type I service provider, which shall be reviewed every four years. The interconnection charge of a dominant Type I service provider shall be reviewed by the NCC in advance, and the NCC has the right to modify the rate.

A dominant fixed-line service provider shall unbundle its network elements. The unbundled network elements shall contain the following:

 

    local loops;

 

    local switch transmission equipment;

 

    local trunks;

 

    toll switch transmission equipment;

 

    long distance trunks;

 

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    international switch transmission equipment;

 

    network interfaces;

 

    directory equipment and services; and

 

    signaling network equipment.

Unless otherwise provided by the laws, interconnection charge of the providers for mobile communications businesses and the 3G mobile communications business should be calculated based on the decrees issued by NCC. The foregoing shall apply, mutatis mutandis, to the calculation and reviewing method of the interconnection charge of the dominant providers for fixed communication services.

Unbundled network components of the providers for mobile communications businesses and the 3G mobile communications business include:

 

    mobile telecommunications trunks;

 

    mobile telecommunications base stations;

 

    controlling equipment of mobile telecommunications base stations;

 

    mobile telecommunications switch transmission equipment; and

 

    other items recognized by the NCC.

The Regulations Governing Network Interconnection among Telecommunications Enterprises specifies the charges for network interconnection among Type I service providers as follow:

 

    Before January 1, 2011, except for international communications, tariffs for communications between a mobile telecommunications network and a fixed-line network were collected from the call-originating subscribers by the call-originating service provider pursuant to the tariff schedules set by the mobile communication service provider, and revenues or any uncollectible accounts from such tariffs went to the mobile service provider. However, from January 1, 2011, although the tariffs shall still be paid by the call-originating subscribers, the tariff schedules are set by the call-originating network service provider, and revenues or any uncollectible accounts from such tariff shall go to the call-originating service provider. During the transition period from January 1, 2011 to December 31, 2016, we, as a dominant Type I fixed-line service provider, shall pay extra transition fee in addition to access charges to the mobile communications service providers.

 

    Tariffs for communications between mobile telecommunications networks shall be paid by the call-originating subscribers pursuant to the tariff schedules set by the call-originating service providers, and the revenues or any uncollectible accounts from such tariffs shall go to the call-originating service providers.

 

    Tariffs for communications between fixed-line network will be determined by the following principles:

 

    tariffs for communications between the local telephone networks shall be paid by the call- originating subscribers pursuant to the tariff schedules set forth by the call-originating service providers, and revenues or any uncollectible accounts from such tariffs shall be allocated to the call-originating service providers;

 

    tariff schedules for local telephone network subscribers using domestic long-distance telephone services shall be set by the domestic long-distance telephone service provider and tariffs shall be collected from local telephone network subscribers using domestic long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the domestic long-distance telephone service providers; and

 

   

tariff schedules for local telephone network subscribers using international long-distance telephone services shall be set by the international long-distance telephone service provider and collected from

 

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local telephone network subscribers using international long-distance telephone services. Revenues or any uncollectible accounts from such tariffs shall be allocated to the international long-distance telephone service providers.

 

    Tariffs schedules for communications between satellite mobile networks and between satellite mobile networks and fixed-line communications networks or mobile communications networks shall both be set by the call-originating service providers. Revenues or any uncollectible accounts from such the tariffs shall go to the call-originating service providers.

 

    Tariffs schedules for communications between the E. 164 VoIP networks provided by the Type I service providers and mobile telecommunications networks, or local telephone networks, or satellite mobile networks shall be set by the call-originating service providers. Revenues or any uncollectible accounts from such tariffs shall go to the call-originating service providers.

Bottleneck Facilities

Under the Telecommunications Act, when a Type I service provider cannot construct bottleneck facilities within a reasonable period of time or substitute those facilities with other available technologies, it may request for co-location on a fee basis from the owner of the facilities located at the bottleneck of the relevant telecommunications network. The owner of the facilities so requested may not reject these requests without due cause. The NCC has the authority to prescribe facilities as bottleneck facilities, and has prescribed bridges, tunnels, lead-in tubes and telecommunications chambers located within buildings and horizontal and vertical telecommunications cables and lines as bottleneck facilities in relation to fixed-line telecommunications networks. The NCC, in an announcement on December 21, 2006, has defined local loop facilities as the “bottleneck” of the telecommunications network and amended the Administrative Rules for Network Interconnection Between Telecommunication Service Providers in April 2007, providing that we, as a Type I service provider, can only charge other local telephone service providers at cost for local loop services. The rental tariff is derived from a cost basis and must be approved by the NCC each year.

Spectrum Allocation

The MOTC is responsible for allocating all radio related frequencies primarily according to the standards set by the International Telecommunications Union. The NCC is responsible for the licensing of operators to use these frequencies. The 900 MHz and 1,800 MHz frequency bands have been allocated for 2G mobile services and the licenses will be expired in June 2017. A total of 40 MHz of FDD spectrum around the 850 MHz frequency band and a total of 110 MHz of FDD spectrum around the 2.1 GHz band have been allocated for 3G mobile services, and the licenses will be expired in December 2018.

On October 30, 2013, NCC completed the bidding process for the spectrum to provide 4G mobile broadband services and a total of 270MHz of FDD spectrum over 700MHz, 900MHz, and 1800MHz frequency bands have been assigned to six nominated bidders, including us, and the licenses will expire in December 2030. The spectrum for 4G mobile broadband services was released adhering to the principle of technological neutrality. Mobile broadband services can be offered by heterogeneous networks, or HetNet, including the 4G network and the 2G network under this technology-neutral spectrum. On December 7, 2015, the NCC completed a second round of bidding on 4G frequency band spectrum. A total of 190 MHz spectrum of the 2500 MHz and 2600 MHz frequency bands were assigned to four nominated bidders, Far EasTone, T-Star, APT and us, and the licenses will expire in December 2033.

Provision of Universal Services

Under the Telecommunications Act, a Type I service provider may be required by the NCC, previously the MOTC, to provide universal telecommunications services in remote or unprofitable areas. These services include voice communication services, such as public phones, and data communication services, such as

 

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internet provision for libraries and public primary and secondary schools. All Type I service providers and certain Type II service providers designated by the NCC, previously the MOTC, will be required to contribute a fixed portion of their annual revenues to a universal services fund. Such a fund will be used to compensate for any losses, bad debts and management fees incurred by the relevant Type I service provider in providing the universal services. All providers of universal services cannot refuse any request for service, unless for legitimate reasons, and cannot charge more than the predetermined tariffs.

Equal Access

As a result of the liberalization of Taiwan’s telecommunications industry, a Type I service provider, including a 3G mobile services provider and a WiMax service operator, is required to provide its customers with equal access to the domestic and international long distance telephone services provided by other service providers. A Type I service provider may provide equal access through pre-selection or call-by-call selection. Before July 1, 2005, all Type I service providers, including us, provide equal access only through call-by-call selection. When a customer makes a call using call-by-call selection, such customer has the option to select a service provider by dialing the network identification prefix assigned to the service provider of his choice. This will result in the automatic selection of the preferred service provider for the provision of relevant telecommunication services. Starting from July 1, 2005, all Type I service providers also provide equal access through pre-selection in Keelung City, Taipei City/County, Taichung City/County and Kaohsiung City/County. Equal access through pre-selection is available throughout Taiwan since January 1, 2006. The pre-selection function allows any customer to select in advance a long distance or international service provider of his or her choice. When such customer makes a call using this function, the communications network will automatically interconnect to the long distance or international network previously selected by such customer.

Number Portability

According to the Telecommunications Act and the Regulations Governing Number Portability, Type I service providers shall provide number portability service which enables customers to retain their existing local and toll free fixed-line telephone numbers or mobile phone numbers when they switch from the original Type I service provider to other Type I service providers. Meanwhile, Type I service providers shall mutually grant each other number portability services on a reciprocal basis, and shall conform in accordance with the principle of impartiality and reasonableness, and shall not be discriminatory.

Under the regulation, we are required to provide number portability service for fixed-line customers in Taipei City, Taipei County (now New Taipei City), Keelung City, Taichung City, Kaohsiung City and other areas where there are two or above fixed-line service providers. We have also provided number portability service for mobile communication customers since October 15, 2005. Pursuant to the regulation, we shall compile and submit related information of number portability for the previous six months to NCC by January 10 and July 10 of each year.

Local Loop Unbundling

In December 2006, the NCC defined the local loop as facilities “at the bottleneck of telecommunications networks” in accordance with the Regulations for Administration on Fixed Network Telecommunications Businesses. The NCC requires us to unbundle the local loops and allow other telecommunications operators to use these connections. The local loop or last mile connections are the physical wire connections between the telephone exchange’s central office to the customer’s premises usually owned by the incumbent telephone company. The NCC further amended the Regulations Governing Network Interconnection among Telecommunications Enterprises in April 2007 which provides that we can only charge other local telephone service providers at cost for local loop services instead of on the basis of commercial negotiations.

 

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Co-location

We have been declared by the governmental authority as a dominant Type I service provider for fixed-line, 2G and 3G services. According to the Telecommunication Act, the Regulations for Administration on Fixed Network Telecommunications Business and the Regulations Governing Network Interconnection among Telecommunications Enterprises, if any other service provider requests for co-location, we must negotiate with them, unless otherwise provided by laws or regulations. As of the end of 2015, we had been co-locating 27 Point of Interface, or POI sites and 2 cable stations with other Type I fixed-line service providers and 9 POI sites with other Type I mobile service providers.

Ownership Limitations

The laws of the ROC limit foreign ownership of our common shares. Prior to March 1, 2006, the MOTC, as the competent authority under the March 1, 2006, the NCC replaced the MOTC as the competent authority under the Telecommunications Act pursuant to the Organization Law. On July 18, 2006, the MOTC and the NCC reached an agreement where the MOTC will have the authority to adjust foreign ownership limits only after negotiations with the NCC. On June 14, 2007, we applied to both the NCC and the MOTC, asking for an increase in direct and indirect foreign ownership cap of our common shares. After consultation with the NCC, the MOTC raised our foreign ownership cap of direct and indirect shareholdings from 49% to 55%. Our foreign ownership limitation of total direct shareholdings remained at 49%.

Fair Trade Act

The requirements and restrictions under the Telecommunication Act regarding price control, IP peering, equal access and accounting separation regulates certain competitive activities among telecommunication industries and aims to reduce the occurrence of anti-competition activities.

By comparison to the Telecommunications Act, the Fair Trade Act, or the FTA, plays a more comprehensive role in regulating all matters relating to competition between enterprises. The Fair Trade Act seeks to deter and prevent anti-competitive conduct by granting the Fair Trade Commission’s powers to investigate and to impose penalties.

The Fair Trade Act is administered and enforced by the Fair Trade Commission, or the FTC, which has independent administration rights granted to it under the Fair Trade Act and is empowered to impose disciplinary actions for fair trade matters. The Fair Trade Commission may initiate an investigation either on its own account in accordance with its discretion granted by the Fair Trade Act or upon receipt of a complaint.

Regulation on Telecommunications Enterprise with Monopoly Status

The term “monopoly” used in the FTA refers to the circumstance where an enterprise conducts its business operation in a relevant market without facing any competition or where an enterprise is able to dominate the relevant market and block competition in the market. If there are two or more enterprises within the same market that do not engage in any price competition with each other, the whole group of non-competing enterprises should be deemed as a single monopoly enterprise in the market.

According to the FTA, an enterprise or a group of enterprises will not be considered as monopolistic enterprise(s) if none of the following circumstances exists:

 

    the market share of the enterprise in a relevant market reaches one-half of the market;

 

    the combined market share of two enterprises in a relevant market reaches two-thirds of the market; and

 

    the combined market share of three enterprises in a relevant market reaches three-fourths of the market.

If the market share of any respective enterprise does not reach one-tenth of the relevant market or if the amount of the enterprise’s total sales in the preceding fiscal year is less than the amount which the authority

 

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announces, such enterprise shall not be considered as a monopolistic enterprise in the relevant market. Notwithstanding the above, the FTC has the ultimate discretion to consider an enterprise as a monopolistic enterprise upon any other events evidencing such enterprise’s capability to affect the supply and demand in relevant market or eliminate competition.

Under the FTA, any enterprise with monopoly status is prohibited from engaging in any of the following activities:

 

    directly or indirectly, by using any unfair method to prevent any other enterprises from competing;

 

    improperly set, maintain or change the price for goods or the remuneration for services;

 

    forcing the enterprise’s trading counterpart to give preferential treatment without justification; or

 

    abusing its market power.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, a telecommunications enterprise with monopoly status is likely to be involved with the following activities regulated by the FTA: conducting predatory pricing, price squeezing, cross-subsidies, price discrimination, blocking access to essential facilities, inappropriate preference or differential treatment and entering into long-term agreements to restrict the ability to change counterparties.

If the FTC finds an enterprise liable for violation of regulations governing monopoly, the FTC could impose a monetary fine of not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total sales of the enterprise in the preceding fiscal year. The responsible person of such enterprise may be sentenced to imprisonment of not more than three years.

Regulations on Combination Between Telecommunications Enterprises

The term “merger” used in the FTA refers to any of the following circumstances:

 

    where an enterprise and another enterprise are merged into one;

 

    where any enterprise holds or acquires more than one-thirds of total voting shares or capital of another enterprise;

 

    where any enterprise is assigned by or leases from another enterprise the whole or the major part of the business or properties of such other enterprise;

 

    where any enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter’s business; or

 

    where any enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.

If any merger between or among multiple enterprises falls within any of the following circumstances, a prior approval granted by the FTC shall be required:

 

    as a result of the merger, the enterprise will own at least one-third of the total market share;

 

    there is any enterprise involved with the merger has one-fourth of the market share; or

 

    the aggregate sales amount for the preceding fiscal year of the enterprises and the entities controlled by or affiliated with such enterprise involved with the merger exceeds the threshold amount publicly announced by the FTC from time to time.

Once the telecommunications enterprise files the merger application with the FTC, the FTC will evaluate the pros and cons of the merger by weighing the potential economic efficiency against the disadvantage of reduced competition. If the FTC finds the potential economic efficiency generated from the merger should be

 

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able to offset the disadvantage of reduced competition caused, the FTC will grant the approval for the merger. Furthermore, the FTC may, when granting an approval, impose certain conditions or undertakings on the applicants to ensure that the overall economic benefit to be generated from the merger outweighs the disadvantage of the reduction in competition.

Regulations on Concerted Action (Cartel) in Telecommunication Industry

The term “concerted action (cartel)” as used in the FTA means the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding, with any other competing enterprise, to jointly determine the price of goods or services, quantity, technology, products, facilities, trading counterparts, or trading territory with respect to such goods and services, and thereby to restrict each other’s business activities. The FTC may assume a concerted action exists based on the market condition, the feature of goods or services, cost and profit, and the economic feasibility for enterprises to conduct concerted action. Notwithstanding the above, the term concerted action as used in the FTA is limited to any concerted action at the same production and/or marketing stage that would affect the market function of production, trade in goods, or supply and demand of services. Under the FTA, enterprises are prohibited from engaging in any concerted actions unless the FTC holds the concerted action may be beneficial to overall economy and public interest.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, a telecommunications enterprise may be able to involve with the following concerted actions: entering into common pricing agreement, restriction of output and market segregation, concerted refusal to deal, or entering into agreement for exchange of information.

If the FTC finds an enterprise liable for violation of regulations governing concerted action (cartel), the FTC could impose a monetary fine of not more than NT$100,000,000 each time. If the FTC finds such violation is serious, it may further impose a monetary fine exceeding the NT$100,000,000 but up to 10% of the total sales of the enterprise in the preceding fiscal year. The responsible person of such enterprise may be sentenced to imprisonment of not more than three years.

Regulations on Unfair Competition in Telecommunication Industry

The FTA prohibits any enterprise from conducting any of the following activities that may restrict competition or impede fair competition:

 

    forcing another enterprise to discontinue supply, purchase or other business transactions with a particular enterprise for the purpose of injuring such particular enterprise;

 

    treating another enterprise discriminatively without justification;

 

    preventing competitors from participating or engaging in competition by inducing customers with low price or other illegal inducements;

 

    forcing another enterprise to refrain from competing in price, or to take part in a merger, or a concerted action, or to perform vertical restrictions by coercion, inducement with interest, or other improper methods; or

 

    setting improper restrictions on its trading counterparts’ business activity as the condition to reach business engagement.

According to the FTC’s Explanation on Regulations Governing Telecommunication Industry, the telecommunications enterprise may be involved with the following activities that may restrict competition or impede fair competition: conducting vertical trading restraint, boycott, discrimination, improper sales discount, sales with gift or lottery or tie-in sales.

If any enterprise violates the regulations governing unfair competition, the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in

 

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addition, the FTC may assess upon such enterprise an administrative fine of not less than NT$100,000 nor more than NT$50,000,000. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine of not less than NT$200,000 nor more than NT$100,000,000 until its ceasing therefrom, rectifying its conduct or taking the necessary corrective action.

Regulations on the Representations or Symbol Used by Telecommunications Enterprise on Goods or in Advertisement

The FTA prohibits any enterprise from making or using false or misleading representations or symbol as to price, quantity, quality, content, production process, production date, valid period, method of use, purpose of use, place of origin, manufacturer, place of manufacturing, processor, place of processing on goods, or any items which attract customers or in advertisements, or in any other way making known to the public.

If an enterprise violates the applicable provisions under the FTA that prohibit false or misleading representations, the FTC may order it to cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order; in addition, the FTC may assess upon such enterprise an administrative fine. Should such enterprise fail to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period, the FTC may continue to order such enterprise to cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order, and each time may successively assess thereupon an administrative fine until its ceasing therefrom, rectifying its conduct or taking the necessary corrective action.

Other Regulations

In addition to the competitive activities expressly regulated by the FTA, the enterprise shall further be prohibited from conducting any fraudulent activity or significantly unfair activity that may impact the trade order.

Administrative Fee Law

According to the Administrative Fee Law, central and local governments, government agencies and schools are empowered to collect administrative fees from us and other telecommunications services providers for the telecommunications facilities built on public roads and properties. Under the Administrative Fee Law, Urban Road Act and Local Road Act, road authorities of municipal governments may collect usage fees from users of local roads, including us, for establishing lines along with the local roads. The fee schedule is set up in the Standard for Usage Fees of Local Roads.

Under the Public Road Law, administrative authorities of public roads may collect usage fees from the users of public roads. According to the Rules Governing Collection of Usage Fees on Public Roads, the relevant collection agencies, including agencies designated by the MOTC and municipal governments, depending on the types of public roads, may collect usage fees from users, including us, for establishing lines along with the public roads.

Personal Data Protection

The amendment of the Personal Information Protection Act, or PIPA, replaced the former Computer-Processed Personal Data Protection Act, or CPPDPA, and became fully effective on October 1, 2012, except for its Articles 6 and 54 that await further determination by the Executive Yuan. Under the PIPA, every individuals or governmental or non-governmental agencies, including us, should be subject to certain requirements and

 

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restrictions for collecting, processing or using personal data. The definition of “personal data” is extended to cover a broad scope, including name, birthday, ID, special features, fingerprints, marriage status, family, education, occupation, medical records, medical history, generic information, sex life, health examination report, criminal records, contact information, financial status, social activities, and any other data which is sufficient to directly or indirectly identify a specific person. If we fail to comply with the PIPA, we may be subject to serious punishment for civil claims, criminal offenses and administrative liabilities: the ceiling of the aggregate compensation amount for damages payable in a single case will be up to NT$200 million or the actual value of loss arising from our violation provided the amount of actual value of such loss is higher than NT$200 million; the defendant may be subject to an imprisonment of up to five years; and the penalty for administrative liabilities will be up to NT$500,000 for each violation, and may be imposed consecutively if such violation continues.

Statute of Chunghwa Telecom Co., Ltd.

The Executive Yuan, on April 27, 2012, proposed a motion for the abolishment of the Statute of Chunghwa Telecom Co., Ltd. for legislative approval. The Legislative Yuan formally approved the motion on December 9, 2014 and the President of the ROC pronounced the abolishment of the law effective from December 24, 2014. The abolishment has no material impact on our company.

C. Organizational Structure

Set forth below is a diagram indicating our organization structure as of March 31, 2016.

 

 

LOGO

D. Property, Plant and Equipment

Please refer to “—B. Business Overview” for a discussion of our property, plant and equipment.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and the notes to such statements included in this annual report.

For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended December 31, 2015 have been translated into U.S. dollar amounts using US$1.00=NT$32.79, set forth in the statistical release of the Federal Reserve Board on December 31, 2015. The U.S. dollar translation appears in parentheses next to the relevant NT dollar amount.

Overview

A number of recent and expected future developments have had, and in the future may have, a material impact on our financial condition and results of operations. These developments include:

 

    changes in our revenue composition and sources of revenue growth;

 

    tariff adjustments;

 

    capital expenditures as a result of technological improvements and changes in our business;

 

    personnel expenses;

 

    taxation; and

 

    effect of adopting Taiwan IFRSs on our dividends and employee bonuses.

Each of these developments is discussed below.

Changes in our revenue composition and sources of revenue growth

Our domestic fixed communications business revenues are derived primarily from the provision of local, domestic long distance, broadband access, leased line service, MOD, and other domestic services including ICT, cloud services, corporate solution services, billing handling services and the leasing of real estate properties. In addition, we also derive fixed-line revenues from providing interconnection services to other carriers. Our revenues from mobile communications business are principally derived from the provision of mobile services, sales of mobile handsets, tablets and data cards and other mobile services. Our revenues from internet business are generated principally from HiNet internet service, internet VAS, data communication services, internet data center, and other internet services including ICT and cloud services. Our revenues from international fixed communications business are derived primarily from international long distance, international leased line, international data services, satellite services, and other international services. Our other revenues are principally derived from non-telecom services.

The table below sets forth the revenues from our principal lines of business as a percentage of total revenues for the periods indicated.

 

     Year Ended December 31  
     2013     2014     2015  

Revenues:

      

Domestic fixed communications business

     32.2     31.8     31.3

Mobile communications business

     48.5        48.8        49.6   

Internet business

     11.2        11.5        11.1   

International fixed communications business

     6.9        6.8        6.7   

Others

     1.2        1.1        1.3   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

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Our domestic fixed communications business has been an important source of revenue over the last three years. We derive domestic fixed communications from the provision of FTTx and ADSL access services that provides customers with data access lines. The percentage of total revenues derived from domestic fixed communication decreased in both 2014 and 2015 mainly due to the decline of domestic long distance and local call service revenue because of mobile and VoIP substitution, and reductions in tariffs for FTTx and ADSL services. We believe that domestic fixed communications business will continue to generate a significant portion of our revenues.

Revenues from our mobile communications business made a major contribution to our revenues over the last three years. We have experienced a significant increase in revenues generated by our mobile VAS due to the popularity of smartphone and increase in mobile internet subscribers. As a result, we believe that our mobile communications business will continue to generate a significant portion of our revenues.

Our internet business was another important source of revenues over the last three years. We derived internet business revenues from the provision of HiNet internet service and internet VAS. The percentage of revenues from internet services within total revenues increased from 2013 to 2014, primarily due to the revenue growth in IDC and ICT areas by our subsidiary, CHIEF Telecom Inc., or CHIEF, as well as in government-related internet VAS. The percentage of revenues from internet services within total revenues decreased from 2014 to 2015, mainly due to the decrease in VAS revenue generated from information services of the land administration system that we established for the Land Administration Department of local governments, and the decrease was primarily affected by the downturn in the property market.

We derived our international fixed communications revenues mainly from international long distance telephone services, international leased line services and international data services. Revenues from our international fixed communications business as a percentage of our total revenues slightly decreased from 2013 to 2015, because our international long distance telephone services revenue continued to decline due to VoIP substitution.

Our other revenues decreased from 2013 to 2014, primarily due to lower property sales by our subsidiary, Light Era, and lower government-related ICT revenues by our subsidiary, Chunghwa System Integration Co., Ltd. Our other revenues increased from 2014 to 2015, and the increase was mainly due to operating growth derived from one of our subsidiaries, Chunghwa Precision Test Tech. Co., Ltd., a semiconductor testing company.

Tariff adjustments

We adjust our tariffs and offer promotional packages from time to time primarily in response to market conditions. We also from time to time are required to adjust our pricing in line with domestic regulations.

On January 29, 2010, the NCC announced a tariff reduction plan starting on April 1, 2010 to March 31, 2013. The percentage of decrease set by NCC was DCPI—4.816% for IP Peering fees, domestic leased-line fees, ADSL access fees and long distance tariffs, and DCPI—5.00% for fees for mobile calls to local fixed-lines and other networks and domestic mobile SMS, where DCPI is the year-over-year change of the consumer price index of previous year released by the Directorate-General of Budget, Accounting and Statistics of the Executive Yuan. On February 7, 2013, the NCC announced a new plan for tariff reductions in wholesale tariffs for IP peering and domestic leased line services, and in monthly fees for fixed-line broadband access services (excluding fiber-to-the-home, or FTTH, and fiber-to-the-building, or FTTB) over a period of four years starting on April 1, 2013, which are subject to a reduction by DCPI—5.1749%. The DCPI for 2012 that was used for the tariff reduction starting from April 1, 2013 was 1.93%; and the DCPI for 2013 that was used for the tariff reduction starting from April 1, 2014 was 0.79%; and the DCPI for 2014 that was used for the tariff reduction starting from April 1, 2015 was 1.2%; and the DCPI for 2015 that was used for the tariff reduction starting from April 1, 2016 was -0.31%. While mobile tariffs will not be regulated in this round, according to the revised Administrative Rules for Network Interconnection, the mobile interconnection fees should be reduced from the current NT$2.15 per minute to NT$1.15 per minute, over the period of four years starting from January 5, 2013.

 

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Besides mandatory tariff reduction mentioned above, we voluntarily implemented tariff adjustments in our broadband and mobile businesses in the past few years to consolidate our market share. See “Item 4. Information on the Company—B. Business Overview” for discussions of our voluntary tariff adjustments.

Capital expenditures as a result of technological improvements and changes in our business

In recent years, we have focused on modernizing and upgrading our mobile services network and on developing our FTTx network, which enables transmission of digital information at a high bandwidth over fiber loops. In particular, we have enhanced our telecommunications services through:

 

    continuing to accelerate LTE network construction to improve coverage nationwide and to enhance capacity in dense urban areas after the launch of 4G mobile broadband services in May 2014;

 

    the implementation of a network modernization program, including a gradual transfer from our public switched telephone network to a system based on internet protocol, to remain at the forefront of new technologies;

 

    the development and deployment of environmentally friendly IDCs for meeting the new demands of co-location and cloud computing services;

 

    the deployment of a high-capacity long-haul OTN, and a nationwide internet protocol backbone network with hundreds of Gbps switching routers for internet and managed IP services; and

 

    the expansion and upgrade of our mobile services network as well as Wi-Fi to improve indoor mobile network coverage and transmission speed for mobile internet.

Our long-term goal is to optimize our capital expenditures by focusing on investing in innovative products and services with attractive return profiles. We evaluate our investment opportunities by benchmarking them against internal return requirements.

Personnel expenses

Personnel expenses constitute a significant portion of our operating costs and expenses. In 2013, 2014 and 2015, personnel expenses represented 25.0%, 25.5% and 26.1% of our total operating costs and expenses, respectively, and pension costs represented 1.8%, 1.9% and 1.9% of our total operating costs and expenses, respectively. The table below sets forth information regarding our personnel expenses and as a percentage of our total operating costs and expenses for the periods indicated.

 

     Year Ended December 31  
     2013     2014     2015  
     (in billions of NT$, except percentages)  

Personnel expenses:

               

Salaries

     24.9         13.9     24.9         13.6     25.5         14.1

Insurance

     2.4         1.3        2.6         1.4        2.6         1.4   

Pension

     3.3         1.8        3.4         1.9        3.4         1.9   

Other(1)

     14.5         8.0        15.7         8.6        15.8         8.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total personnel expenses

     45.1         25.0     46.6         25.5     47.3         26.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total operating costs and expenses

     180.4         100.0     182.4         100.0     181.3         100.0

 

(1) Includes employee bonuses.

In accordance with ROC laws and regulations, we offset the decrease of unappropriated earnings arising from the impact of first adoption of Taiwan IFRSs with earnings generated in 2013 before we made any appropriation of earning. As a result, unappropriated earnings in 2013 for earnings appropriation purposes decreased, which affected dividends to our shareholders and bonuses to our employees. In order to compensate

 

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for the decreased employee bonuses, at our board of directors meeting held in March 2014, our directors approved to appropriate a one-time bonus to our employees. See “—Effect of adopting Taiwan IFRSs on our dividends and employee bonuses” below.

At the time of our privatization, we settled all of our then existing defined benefit pension obligations in full. After completing our privatization on August 12, 2005, all of our continuing employees were deemed to have commenced employment as of August 12, 2005 for seniority purposes under our pension plans in effect after privatization. Under applicable ROC regulations, upon our privatization, the MOTC assumed the obligation to make annuity payments to all of our employees that retired before our privatization.

Taxation

The income tax rate for profit-seeking enterprises is 17% in the ROC. We benefit from tax incentives, including tax credits of up to 15% of some of our research and development expenses in accordance with the Statute for Innovating Industries.

In 1997, the Income Tax Law of the ROC was amended to integrate corporate income tax and stockholder dividend tax to eliminate the double taxation effect for resident stockholders of Taiwan companies. Under the amendment, after-tax earnings generated from January 1, 1998 and not distributed to stockholders as dividends in the following year are assessed with a 10% unappropriated earnings tax. See “Item 10. Additional Information—E. Taxation—ROC Taxation—Dividends”. Under IFRSs, the 10% tax on unappropriated earnings is accrued during the year the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year. In accordance with ROC laws and regulations, we offset the decrease of unappropriated earnings arising from the impact of first adoption of Taiwan IFRSs with earnings generated in 2013 before we made any appropriation of earnings in 2014, therefore, the accrued 10% unappropriated earnings tax in 2013 was lower than that in 2014. In 2014, due to the reversal of the 10% unappropriated earnings tax accrued in 2013, which was much lower than that accrued in 2014, net unappropriated earnings tax accrued in 2014 was higher than that accrued in 2015. As a result, our effective tax rate decreased from 19.3% in 2014 to 17.5% in 2015.

Effect of adopting Taiwan IFRSs on our dividends and employee bonuses

Beginning on January 1, 2013, we have adopted Taiwan IFRSs for reporting our annual and interim consolidated financial statements in the ROC in accordance with the requirements of the FSC. At the same time, we have adopted IFRSs, which has certain significant differences from Taiwan IFRSs, for reporting our annual and interim consolidated financial statements with the SEC, including this annual report and future annual reports on Form 20-F. See “Item 3. Key Information—A. Selected Financial Data”.

Our dividends have been calculated based on Taiwan IFRSs since 2013. According to local regulations, our unappropriated earnings before earnings distributions for the year ended December 31, 2013 needs to first offset the decrease of unappropriated earnings on the date of transition to Taiwan IFRSs (January 1, 2012), which led to a decrease in earnings available for our dividends and employee bonuses compared to prior years. As a result of these decreases in our dividends and employee bonuses, in March 2014, our board of directors approved an additional distribution to our shareholders from additional paid-in capital in the amount of NT$16.6 billion and a one-time additional bonus to our employees in the amount of NT$0.7 billion. The NT$16.6 billion additional distributions to our shareholders were approved at our annual general stockholders’ meeting on June 24, 2014 and such amount was subsequently paid in August 2014.

Our financial statements prepared under Taiwan IFRSs have not been included in this annual report and do not form a part of this annual report.

Critical Accounting Policies

Summarized below are our accounting policies that we believe are both important to the portrayal of our financial results and involve the need for management to make estimates about the effect of matters that are

 

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uncertain in nature. Actual results may differ from these estimates, judgments and assumptions. Certain accounting policies are particularly critical because of their significance to our reported financial results and the possibility that future events may differ significantly from the conditions and assumptions underlying the estimates used and judgments made by our management in preparing our financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes, which are included in this annual report.

Revenue Recognition

Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

 

    We have transferred to the buyer the significant risks and rewards of ownership of the goods;

 

    We retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

    The amount of revenue can be measured reliably;

 

    It is probable that the economic benefits associated with the transaction will flow to us; and

 

    The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade notes and accounts receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.

Usage revenues from fixed-line services (including local, domestic long distance and international long distance telephone services), cellular services, internet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon seconds or minutes of traffic processed when the services are provided in accordance with contract terms.

Other revenues are recognized as follows: (a) one-time subscriber connection fees (on fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services, mobile, internet and data services) are accrued every month, and (c) prepaid services (fixed-line, mobile, internet and data services) are recognized as income based upon actual usage by customers.

Where we enter into transactions which involve both the provision of air time bundled with products such as 3G data card and handsets, total consideration received from products and air time in these arrangements are allocated and measured using units of accounting within the arrangement based on their relative fair values limited to the amount that is not contingent upon the delivery of products or services. Relative fair values are based on the selling prices of handsets on a standalone basis and the monthly fees provided in the subscription contracts.

Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract.

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established, under the premises when it is probable that the economic benefits related to the transactions will flow to us and that the revenue can be reasonably measured.

Interest income from a financial asset is recognized when it is probable that the economic benefits related to the transactions will flow to us and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

 

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Impairment of Trade notes and Accounts Receivable

When there is objective evidence showing indications of impairment, we consider the estimation of future cash flows. The amount of impairment will be measured as the difference between the carrying amount and the present value of estimated future cash flows discounted by the original effective interest rates of the financial assets. However, as the impact from discounting short-term receivables is not material, the impairment of short-term receivables is measured at the difference between the carrying amount and the estimated undiscounted future cash flows. Where the actual future cash flows are less than expected, a material impairment loss may arise.

We maintain an allowance for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past customers default experience and their credit status, and economic and industrial factors. Credit risks are assessed based on historical write-offs, net of recoveries, and an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly, and the allowances for doubtful accounts are adjusted through expense accordingly.

Provision for inventory valuation and obsolescence

Inventories are stated at the lower of cost or net realizable value. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made at the end of reporting period. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. Estimates of net realizable value also take into consideration. Inventory write-downs are determined on an item by item basis, except for those similar items which could be categorized into the same groups. We use the inventory holding period and turnover as the evaluation basis for inventory obsolescence losses.

Useful Lives of Long-Lived Assets

A significant portion of our total assets consists of long-lived assets, primarily property, plant and equipment and definite-lived intangibles. We estimate the useful lives of property, plant and equipment and other long-lived assets with finite lives in order to determine the period of time over which depreciation and amortization expenses should be recorded. The useful lives are estimated at the time assets are acquired and are based on historical experience with similar assets as well as the anticipated technological evolution or other environmental changes. Further, we review the estimated useful lives of long-lived assets at the balance sheet date. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization in the relevant periods. Alternatively, technological obsolescence could result in a write-down in the value of the assets to reflect impairment. We review these types of assets for impairment quarterly, or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of an asset. In assessing impairments, we use estimated cash flows that take into account management’s estimates of future operations.

Control over Subsidiaries

Some entities are our subsidiaries although we only own less than 50% ownership interest in these entities. After considering our absolute size of holding in the entity and the relative size of and the dispersion of shares owned by the other shareholders, and the contractual arrangements between us and other investors, potential voting interests and the written agreement between shareholders, the management concluded that we have a sufficiently dominant voting interest to direct the relevant activities of the entity and therefore we have control over these entities.

 

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Investments in Unconsolidated Companies

An associate is an entity over which we have significant influence and that is neither a subsidiary nor an interest in a joint venture. A joint venture is a joint arrangement whereby we and other parties that have joint control of the arrangement and have rights to the net assets of the arrangement.

Investments accounted for using the equity method include investments in associates and interests in joint ventures. Under the equity method, an investment in an associate or joint venture is initially recognized at cost and adjusted thereafter to recognize our share of the profit or loss and other comprehensive income of the associate and joint venture as well as the distribution received.

When we subscribe for additional new shares of the associate and joint venture at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of our proportionate interest in the associate and joint venture. We record such a difference as an adjustment to investments with the corresponding amount charged or credited to additional paid-in capital. When the adjustment should be debited to additional paid-in capital but the additional paid-in capital recognized from investments accounted for by the equity method is insufficient, the shortage is debited to retained earnings.

Any excess of the cost of acquisition over our share of the fair value of the identifiable net assets and liabilities of an associate and joint venture at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment and shall not be amortized. Any excess of our share of the net fair value of the identifiable assets and liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.

We assess the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The entire carrying amount of the investment, including goodwill, is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. We measure the impairment based on the projected future cash flow of the investees, the underlying assumptions for which had been formulated by such investees’ internal management team, taking into account sales growth and capacity utilization. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

Our other equity investments are classified as available-for-sale, or AFS, financial assets including: listed stocks, emerging market stocks, and unlisted stocks. Among these investments, those that have a quoted market price in an active market are classified as AFS and measured at fair value at the end of each reporting period; the others that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between the carrying amount and the fair value is recognized in profit or loss.

Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS financial assets are recognized in other comprehensive income and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired.

The process of assessing whether a particular investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. We periodically evaluate these investments based on quoted market prices, if available, the financial condition of the investee company, economic conditions in the industry and our intent and ability to hold the investment for a long period of time. If quoted market prices are not available, we

 

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estimate the fair value using the recoverable amounts in consideration of the financial condition of the investee company. This information may be based on information that we request from the investee companies and may not be subject to the same disclosure and audit requirements as required of non-foreign private issuers, and as such, the reliability and accuracy of the information may vary. If we deem the fair value of an investment to be less than the carrying value based on the above factors, and the decline in value is deemed to be other than temporary, we record the difference as impairment in the period of occurrence. In 2013, 2014 and 2015, we recognized impairment losses of NT$66 million, NT$23 million and NT$107 million (US$3.3 million), respectively, for the investments classified as AFS financial assets.

Impairment of long-lived assets and intangible assets

We assess the impairment of long-lived assets and intangible assets whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. Indications we consider important which could trigger an impairment review include, but are not limited to, the following:

 

    External sources of information:

 

    during the period, an asset’s market value has declined significantly more than what would be expected as a result of the passage of time or normal use.

 

    significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.

 

    market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.

 

    the carrying amount of the net assets of the entity is more than its market capitalization.

 

    Internal sources of information:

 

    evidence is available of obsolescence or physical damage of an asset.

 

    significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used.

 

    evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

When an indication of impairment is identified for long-lived assets and intangible assets other than goodwill, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, as if no impairment loss had been recognized.

Goodwill represents the excess of the consideration paid for business acquisition over the fair value of identifiable net assets acquired. Goodwill is tested for impairment at least annually, or if an event occurs or circumstances change which indicates that the fair value of goodwill is below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

In 2013, 2014 and 2015, we determined that some of our telecommunication equipment and miscellaneous equipment were impaired and recognized an impairment loss of NT$254 million, NT$64 thousand, and NT$138 million (US$4.2 million) respectively.

 

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In 2013 and 2015, we determined that some of our investment properties’ recoverable amount which represented the fair value less costs to sell of some land and buildings was higher than the carrying amount and recognized reversals of impairment loss of NT$246 million and NT$142 million (US$4.3 million), respectively.

Goodwill amounting to NT$18 million arising from the business combination of a subsidiary, Chunghwa Investment Co., Ltd., or CHI, was fully impaired for the year ended December 31, 2013 because CHI underwent organizational and operational downsizing, and the goodwill was considered no longer exist.

Pension Benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees rendered services entitling them to the contributions.

Defined benefit costs (including service cost, net interest and remeasurement) under the defined benefit retirement benefit plans are determined using the projected unit credit method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.

Service cost (including current service cost and gains or losses on settlements) and net interest on the net defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising (a) actuarial gains and losses; and (b) the return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss.

Net defined benefit liability (asset) represents the actual deficit (surplus) in our defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any refunds from the plans or reductions in future contributions to the plans.

Curtailment or settlement gains or losses on the defined benefit plan are recognized when the curtailment or settlement occurs.

Accounting for Income Taxes

Income tax expense represents the sum of the tax currently payable and deferred tax.

The current tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statements of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Income tax (10%) on undistributed earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the stockholders in the following year. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. If the temporary difference arises from the initial recognition, other than in a business combination, of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax liability is not recognized on taxable temporary difference arising from initial recognition of goodwill.

 

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Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits from purchase of machinery, equipment and technology, and research and development expenditures to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the balance sheet date, and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which we expect at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income.

Our Financial Reporting Obligations

Our ongoing financial reporting in our Form 20-F annual reports and interim financial reporting furnished to the SEC on Form 6-K had been based on U.S. GAAP through fiscal year 2007. Beginning with our first quarter interim financial report furnished on Form 6-K and our Form 20-F annual report for fiscal year 2008, we prepared our financial statements under ROC GAAP, with reconciliations of net income and balance sheet differences of our consolidated financial statements to U.S. GAAP. Beginning in 2013, we adopted Taiwan IFRSs for our reporting obligations in the ROC, including our annual consolidated financial statements and our interim quarterly unaudited consolidated financial statements beginning in the first quarter of 2013. While we have adopted Taiwan IFRSs for ROC reporting obligations, we prepared financial statements under IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for the SEC filing purposes, we are no longer required to provide any reconciliation of our consolidated financial statements with U.S. GAAP.

 

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A. Operating Results

The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data for the periods indicated.

 

     Year Ended December 31  
         2013              2014              2015      
     NT$      NT$      NT$      US$  
     (in billions)  

Revenues:

           

Domestic Fixed Communications

     73.5         72.1         72.5         2.2   

Mobile communications

     110.6         110.7         114.9         3.5   

Internet

     25.4         26.0         25.8         0.8   

International fixed communications

     15.8         15.3         15.5         0.5   

Others

     2.7         2.5         3.1         0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     228.0         226.6         231.8         7.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating costs

     147.3         148.4         148.1         4.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Marketing

     25.2         26.1         25.1         0.8   

General and administrative

     4.2         4.4         4.5         0.1   

Research and development

     3.7         3.5         3.6         0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     33.1         34.0         33.2         1.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income and expenses

     0.1         0.6         (0.1      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     47.7         44.8         50.4         1.6   

Other income, net

     1.4         1.8         1.6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax

     49.1         46.6         52.0         1.6   

Income tax expense

     6.5         9.0         9.1         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated net income

     42.6         37.6         42.9         1.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Attributable to:

           

Stockholders of the parent

     41.5         37.0         42.1         1.3   

Noncontrolling interests

     1.1         0.6         0.8         —     

 

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The following table sets forth our revenues, operating costs and expenses, income from operations and other financial data as a percentage of our total revenues for the periods indicated.

 

     Year Ended December 31  
             2013                     2014                     2015          
     (as percentages of total revenues)  

Revenues:

      

Domestic fixed communications

     32.2     31.8     31.3

Mobile communications

     48.5        48.8        49.6   

Internet

     11.2        11.5        11.1   

International fixed communications

     6.9        6.8        6.7   

Others

     1.2        1.1        1.3   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Operating costs

     64.6     65.5     63.9
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Marketing

     11.1        11.5        10.8   

General and administrative

     1.8        2.0        1.9   

Research and development

     1.6        1.5        1.6   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     14.5        15.0        14.3   
  

 

 

   

 

 

   

 

 

 

Other income and expenses

     —          0.3        (0.1
  

 

 

   

 

 

   

 

 

 

Income from operations

     20.9        19.8        21.7   

Other income, net

     0.6        0.8        0.7   
  

 

 

   

 

 

   

 

 

 

Income before income tax

     21.5        20.6        22.4   

Income tax expense

     2.8        4.0        3.9   
  

 

 

   

 

 

   

 

 

 

Consolidated net income

     18.7     16.6     18.5
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Stockholders of the parent

     18.2     16.3     18.2

Noncontrolling interests

     0.5     0.3     0.3

Each of our operating segments is managed separately because each represents a strategic business unit that serves a different market. We measure our segment performances mainly based on revenues and income before tax.

The year ended December 31, 2015 compared with the year ended December 31, 2014

Revenues

Our revenues increased by 2.3% from NT$226.6 billion in 2014 to NT$231.8 billion (US$7.1 billion) in 2015. This increase was primarily due to the increase in revenues generated from mobile communications.

Domestic fixed communications

Domestic fixed communications revenues accounted for 31.8% and 31.3% of our revenues in 2014 and 2015, respectively. Our domestic fixed-line revenues increased by 0.7% from NT$72.1 billion in 2014 to NT$72.5 billion (US$2.2 billion) in 2015 primarily due to growth in ICT revenues generated by enterprises and government, which was partially offset by a decrease in local and domestic long distance telephone revenues.

Local telephone services. Our local telephone revenues decreased from NT$35.6 billion in 2014 to NT$33.6 billion (US$1.0 billion) in 2015 with a 9.1% decline in traffic volume from 11.6 billion minutes in 2014

 

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to 10.5 billion minutes in 2015. The decline in traffic volume was primarily due to the traffic migration from fixed-line services to mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.

Domestic long distance telephone services. Our domestic long distance telephone revenues decreased by 5.7% from NT$3.3 billion in 2014 to NT$3.1 billion (US$0.1 billion) in 2015. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.

Broadband access. The number of our FTTx customers increased from approximately 3.1 million in 2014 to approximately 3.4 million in 2015. The number of our ADSL customers decreased from 1.4 million in 2014 to 1.1 million in 2015 due to the customers’ migration to our FTTx services. Revenues generated from broadband access slightly increased from NT$19.1 billion in 2014 to NT$19.3 billion (US$0.6 billion) in 2015, mainly due to our successful migration strategy mentioned above.

Domestic leased line. Our tariffs for overall leased line services have continued to decrease due to competition from other fixed-line operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line services decreased from NT$4.6 billion in 2014 to NT$4.4 billion (US$0.1 billion) in 2015.

MOD. Revenues generated from our MOD services decreased by 3.0% from NT$2.6 billion in 2014 to NT$2.5 billion (US$0.1 billion) in 2015. This decrease was due to the adjustment in our cooperation schemes with channel providers. The new schemes bring down our operating expenses while also impacting our revenues at the same time. We expect this structural shift to enhance our IPTV margins in the mid-to-long term.

Others. Other revenues increased by 39.6% from NT$6.9 billion in 2014 to NT$9.6 billion (US$0.3 billion) in 2015. This increase was mainly due to the increased number of ICT projects generated by enterprises and government.

Mobile communications

Revenues from our mobile communications business segment accounted for 48.8% and 49.6% of our revenues in 2014 and 2015, respectively. Revenues from our mobile communications business segment increased by 3.8% from NT$110.7 billion in 2014 to NT$114.9 billion (US$3.5 billion) in 2015. This increase was principally due to growth in mobile VAS revenues and was partially offset by a decline in mobile voice telecommunication revenues. The decrease in mobile voice telecommunication traffic was mainly due to migration to free VoIP applications.

Mobile services. Revenues from our mobile services accounted for 34.2% and 34.9% of our revenues in 2014 and 2015, respectively. Revenues from our mobile services increased by 4.4% from NT$77.5 billion in 2014 to NT$80.9 billion (US$2.5 billion) in 2015 due to an increase in mobile VAS revenues from NT$34.8 billion in 2014 to NT$39.6 billion (US$1.2 billion) in 2015, which was partially offset by a decline in mobile voice telecommunication revenues.

Sales of mobile handsets, tablets and data cards. Revenues from our sales of mobile handsets, tablets and data cards accounted for 14.3% of our revenues both in 2014 and 2015. Revenues from our sales of mobile handsets, tablets and data cards increased by 2.2% from NT$32.5 billion in 2014 to NT$33.2 billion (US$1.0 billion) in 2015. This increase was principally due to an increase in sales of smart devices such as iPhone.

Internet

Internet revenues accounted for 11.5% and 11.1% of our revenues in 2014 and 2015, respectively. Revenues from our internet services decreased slightly by 0.8% from NT$26.0 billion in 2014 to NT$25.8 billion

 

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(US$0.8 billion) in 2015 due to a decrease in VAS revenue generated from information services of the land administration system that we established for the Land Administration Department of local governments, and the decrease was primarily affected by the downturn in the property market.

International fixed communications

International fixed communications revenues accounted for 6.8% and 6.7% of our revenues in 2014 and 2015, respectively. Our international fixed communications revenues increased by 1.0% from NT$15.3 billion in 2014 to NT$15.5 billion (US$0.5 billion) in 2015. This increase was mainly derived from one of our overseas subsidiaries, and from international leased line and international data services.

International long distance telephone services. Our international long distance telephone revenues decreased by 7.5% from NT$10.4 billion in 2014 to NT$9.6 billion (US$0.3 billion) in 2015 due to migration to VoIP-based international long distance service providers and free VoIP applications.

International leased line and international data services. Our international leased line and international data revenues increased by 13.1% from NT$3.2 billion in 2014 to NT$3.6 billion (US$0.1 billion) in 2015. The increase was mainly due to our expansion to overseas markets such as Japan, Hong Kong, Singapore, Thailand and Cambodia and increased demand for our international leased line, IP Transit and VPN services.

International ICT and other services. Our international ICT and other revenues increased by 50.1% from NT$1.0 billion in 2014 to NT$1.6 billion (US$47.4 million) in 2015. The increase was mainly due to increased revenues generated from the wholesale of international long distance minutes derived from one of our overseas subsidiaries, Chunghwa Telecom Singapore Pte., Ltd.

Others

Other revenues accounted for 1.1% and 1.3% of our revenues in 2014 and 2015, respectively. Our other revenues increased by 22.3% from NT$2.5 billion in 2014 to NT$3.1 billion (US$0.1 billion) in 2015. The increase was mainly due to operating growth derived from one of our subsidiaries, Chunghwa Precision Test Tech. Co., Ltd., a semiconductor testing company.

Operating Costs

Operating costs include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service expenses, costs of materials and maintenance and spectrum usage and license fees.

Our operating costs decreased by 0.2% from NT$148.4 billion in 2014 to NT$148.1 billion (US$4.5 billion) in 2015. This decrease was primarily due to a decrease of NT$2.8 billion (US$0.1 billion) in interconnection and service expenses, and a decrease of NT$1.4 billion (US$42.4 million) in depreciation expenses. The decrease was partially offset by an increase of NT$2.3 billion (US$68.6 million) in ICT costs, an increase of NT$1.0 billion (US$31.3 million) in cost of goods sold and an increase of NT$0.8 billion (US$25.2 million) in amortization expenses.

Operating Expenses

Our operating expenses decreased by 2.5% from NT$34.0 billion in 2014 to NT$33.2 billion (US$1.0 billion) in 2015. This decrease was primarily due to a decrease in marketing expenses.

Marketing

Our marketing expenses, which include personnel expenses, expenses relating to advertising and marketing-related activities and provision for bad debt, decreased by 4.1% from NT$26.1 billion in 2014 to NT$25.1 billion

 

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(US$0.8 billion) in 2015. This decrease was primarily due to a decrease of outsourcing expenses in 2015 and the voluntary retirement program implemented in 2014, which resulted in a higher pension expense in 2014.

General and administrative

Our general and administrative expenses increased by 2.3% from NT$4.4 billion in 2014 to NT$4.5 billion (US$0.1 billion) in 2015. This increase was primarily due to an increase in bonuses to employees.

Research and development

Our research and development expenses increased by 3.2% from NT$3.5 billion in 2014 to NT$3.6 billion (US$0.1 billion) in 2015. This increase was primarily due to an increase in personnel expenses for research and development. In 2014 and 2015, we did not capitalize any research and development expenses as intangible assets because there were no research and development expenses related to development or the development phase of an internal project in 2014 and 2015.

Operating Costs and Expenses by Business Segment

 

    Domestic Fixed
Communications
    Mobile
Communications
    Internet     International
Fixed
Communications
    Other     Adjustment     Total  
    (in billions of NT$)  

For the year ended December 31, 2015

             

Operating costs and expenses

    71.0        98.9        20.6        16.5        9.2        (34.9     181.3   

Depreciation and amortization

    17.5        10.4        3.6        1.5        0.4        —          33.4   

For the year ended December 31, 2014

             

Operating costs and expenses

    72.6        96.9        21.3        17.5        8.5        (34.4     182.4   

Depreciation and amortization

    18.6        9.9        3.4        1.8        0.4        —          34.1   

Domestic fixed communications

Our domestic fixed communications costs and expenses decreased by 2.2% from NT$72.6 billion in 2014 to NT$71.0 billion (US$2.2 billion) in 2015, primarily due to a decrease of NT$2.1 billion (US$0.1 billion) in intersegment interconnection costs, a decrease of NT$1.1 billion (US$32.0 million) in depreciation and amortization expenses, a decrease of NT$0.7 billion (US$18.9 million) in personnel expenses, and a decrease of NT$0.7 billion (US$20.1 million) in material expenses. The decrease in our operating costs was partially offset by an increase of NT$2.7 billion (US$0.1 billion) in ICT costs.

Mobile communications

Our mobile communications operating costs and expenses increased by 2.1% from NT$96.9 billion in 2014 to NT$98.9 billion (US$3.0 billion) in 2015. This increase was primarily due to an increase of NT$2.4 billion (US$0.1 billion) in leased line expenses, an increase of NT$1.0 billion (US$30.5 million) in cost of goods sold, and an increase of NT$0.5 billion (US$16.2 million) in depreciation and amortization expenses from 4G mobile broadband construction and license fees. The increase in our operating costs was partially offset by a decrease of NT$1.6 billion (US$47.6 million) in interconnection costs.

Internet

Our internet operating costs and expenses decreased by 2.9% from NT$21.3 billion in 2014 to NT$20.6 billion (US$0.6 billion) in 2015. This decrease was primarily due to a decrease of NT$0.6 billion (US$16.5 million) in internet VAS expenses and a decrease of NT$0.5 billion (US$16.2 million) in ICT costs. The decrease in our operating costs was partially offset by an increase of NT$0.6 billion (US$17.1 million) in maintenance and rental expenses.

 

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International fixed communications

Our international fixed communications costs and expenses decreased by 5.6% from NT$17.5 billion in 2014 to NT$16.5 billion (US$0.5 billion) in 2015. The decrease was primarily due to a decrease of NT$0.6 billion (US$18.6 million) in intersegment interconnection costs, a decrease of NT$0.3 billion (US$8.8 million) in depreciation and amortization expenses, a decrease of NT$0.2 billion (US$6.1 million) in personnel expenses and a decrease of NT$0.2 billion (US$7.3 million) in rental expenses for international communications equipment. The decrease in our operating costs was partially offset by an increase of NT$0.5 billion (US$17.7 million) in operating costs and expenses from our subsidiaries, Chunghwa Telecom Singapore Pte., Ltd, and Donghwa Telecom Co., Ltd. due to the business growth of these two entities.

Others

The costs and expenses from our other business increased by 9.4% from NT$8.5 billion in 2014 to NT$9.2 billion (US$0.3 billion) in 2015. The increase was primarily due to an increase in personnel expenses from our subsidiary, Honghwa. The increase was partially offset by a decrease in personnel costs and ICT costs of Chunghwa Telecom Co., Ltd.

Other Income and Expenses

We recorded net other income of NT$0.6 billion in 2014 and net other expenses of NT$0.1 billion (US$3.2 million) in 2015, respectively. The difference between 2014 and 2015 was primarily due to the gain on disposal of investment properties of NT$0.6 billion in 2014 by our subsidiary, Light Era.

Income from Operations and Operating Margin

As a result of the foregoing, our income from operations increased by 12.4% from NT$44.8 billion in 2014 to NT$50.4 billion (US$1.5 billion) in 2015. Our operating margin increased from 19.8% in 2014 to 21.7% in 2015.

The following table sets forth certain information regarding our revenues and income before income tax by business segment for the periods indicated.

 

    Domestic Fixed
Communications
    Mobile
Communications
    Internet     International
Fixed
Communications
    Other     Adjustment     Total  
    (in billions of NT$)  

For the year ended December 31, 2015

             

Revenues from external customers

    72.5        114.9        25.8        15.5        3.1        —          231.8   

Intersegment service revenues

    21.4        3.5        4.7        2.1        3.2        (34.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    93.9        118.4        30.5        17.6        6.3        (34.9     231.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income before income tax

    23.3        19.4        9.9        1.1        (1.7     —          52.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2014

             

Revenues from external customers

    72.1        110.7        26.0        15.3        2.5        —          226.6   

Intersegment service revenues

    19.7        5.3        4.7        2.3        2.4        (34.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    91.8        116.0        30.7        17.6        4.9        (34.4     226.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income before income tax

    19.5        19.3        9.6        0.2        (2.0     —          46.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the foregoing, segment income before tax for our domestic fixed communications business increased by 18.9% from NT$19.5 billion in 2014 to NT$23.3 billion (US$0.7 billion) in 2015; segment income before tax for our mobile communications business increased by 0.4% from NT$19.3 billion in 2014 to NT$19.4 billion (US$0.6 billion) in 2015; segment income before tax for our internet business increased by 3.9%

 

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from NT$9.6 billion in 2014 to NT$9.9 billion (US$0.3 billion) in 2015; segment income before tax for our international fixed communications business increased by 486.4% from NT$0.2 billion in 2014 to NT$1.1 billion (US$0.03 billion) in 2015; and segment loss for our other business segments decreased by 16.3% from NT$2.0 billion in 2014 to NT$1.7 billion (US$0.05 billion) in 2015.

Non-operating Income and Expenses

Our non-operating income decreased from NT$1.8 billion in 2014 to NT$1.6 billion (US$0.05 billion) in 2015. This decrease was primarily due to a decrease in foreign currency exchange gains and an increase in impairment losses on available-for-sale financial assets.

Income Tax

Our income tax was NT$9.0 billion and NT$9.1 billion (US$0.3 billion) in 2014 and 2015, respectively. Our effective tax rate was 19.3% in 2014 and 17.5% in 2015. The decrease in our effective tax rate from 2014 to 2015 was primarily due to a decrease in the accrued 10% tax on unappropriated earnings. See “Item 5. Operating and Financial Review and Prospects—Overview—Taxation” for a discussion of the change in tax rate.

Net Income

As a result of the foregoing, our net income attributable to stockholders of the parent was NT$37.0 billion and NT$42.1 billion (US$1.3 billion) in 2014 and 2015, respectively. Our net margin increased from 16.3% in 2014 to 18.2% in 2015.

The year ended December 31, 2014 compared with the year ended December 31, 2013

Revenues

Our revenues decreased by 0.6% from NT$228.0 billion in 2013 to NT$226.6 billion in 2014. This decrease was primarily due to the decrease in revenues generated from domestic fixed communications.

Domestic fixed communications

Domestic fixed communications revenues accounted for 32.2% and 31.8% of our revenues in 2013 and 2014, respectively. Our domestic fixed-line revenues decreased by 2.0% from NT$73.5 billion in 2013 to NT$72.1 billion in 2014 primarily due to the general migration to the use of mobile services and the increased use of VoIP applications.

Local telephone services. Our local telephone revenues decreased from NT$37.8 billion in 2013 to NT$35.6 billion in 2014 with a 10.6% decline in traffic volume from 12.9 billion minutes in 2013 to 11.6 billion minutes in 2014. The decline in traffic volume was primarily due to the traffic migration from fixed-line services to mobile and internet telephone services. We expect this trend to continue as broadband and mobile services become more popular in Taiwan.

Domestic long distance telephone services. Our domestic long distance telephone revenues decreased by 4.6% from NT$3.5 billion in 2013 to NT$3.3 billion in 2014. This decrease was mainly due to the traffic migration to mobile services and the increased use of VoIP applications.

Broadband access. The number of our FTTx customers increased from approximately 3.0 million in 2013 to approximately 3.1 million in 2014. The number of our ADSL customers decreased from 1.6 million in 2013 to 1.4 million in 2014 due to the customers’ migration to our FTTx services. Despite our effort to migrate our customers to higher ARPU FTTx services, revenues generated from broadband access remained the same of approximately NT$19.1 billion in both 2013 and 2014 mainly due to the mandatory tariff reduction required by the NCC and our promotional packages and discounts provided for existing customers.

 

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Domestic leased line. Our tariffs for overall leased line services have continued to decreased due to the competition from other fixed-line operators, as well as the continued migration of domestic leased line customers to high speed broadband services. Revenues generated from domestic leased line decreased from NT$5.1 billion in 2013 to NT$4.6 billion in 2014.

MOD. Revenues generated from our MOD services increased by 15.8% from NT$2.2 billion in 2013 to NT$2.6 billion in 2014. This increase was due to the increase in the number of MOD subscribers.

Others. Other revenues increased by 18.7% from NT$5.8 billion in 2013 to NT$6.9 billion in 2014. This increase was mainly due to the increased corporate customers of our ICT solution services.

Mobile communications

Revenues from our mobile communications business segment accounted for 48.5% and 48.8% of our revenues in 2013 and 2014, respectively. Revenues from our mobile communications business segment increased by 0.1% from NT$110.6 billion in 2013 to NT$110.7 billion in 2014. This increase was principally due to the growth of mobile VAS revenues and was partially offset by the decline of mobile voice telecommunication revenues and mobile handsets sales revenues. The decrease of mobile voice telecommunication traffic was mainly due to the migration to free VoIP applications.

Mobile services. Revenues from our mobile services accounted for 33.6% and 34.2% of our revenues in 2013 and 2014, respectively. Revenues from our mobile services increased by 1.0% from NT$76.7 billion in 2013 to NT$77.5 billion in 2014 due to the increase in mobile VAS revenues from NT$28.4 billion in 2013 to NT$34.8 billion in 2014, which was partially offset by the decline of mobile voice telecommunication revenues.

Sales of mobile handsets, tablets and data cards. Revenues from our sales of mobile handsets, tablets and data cards accounted for 14.5% and 14.3% of our revenues in 2013 and 2014, respectively. Revenues from our sales of mobile handsets, tablets and data cards decreased by 2.0% from NT$33.1 billion in 2013 to NT$32.5 billion in 2014. This decrease was principally due to lower high-tier smartphones sales by our subsidiary, Senao.

Internet

Internet revenues accounted for 11.2% and 11.5% of our revenues in 2013 and 2014, respectively. Revenues from our internet services increased by 2.2% from NT$25.4 billion in 2013 to NT$26.0 billion in 2014 due to the revenue growth in IDC and ICT areas by our subsidiary, CHIEF, as well as in government-related internet VAS.

International fixed communications

International fixed communications revenues accounted for 6.9% and 6.8% of our revenues in 2013 and 2014, respectively. Our international fixed communications revenues decreased by 2.8% from NT$15.8 billion in 2013 to NT$15.3 billion in 2014. This decrease was mainly due to lower international long distance revenue because of increased market competition.

International long distance telephone services. Our international long distance telephone revenues decreased by 7.3% from NT$11.2 billion in 2013 to NT$10.4 billion in 2014 due to the migration to VoIP-based international long distance service providers and free VoIP applications.

International leased line and international data services. Our international leased line and international data revenues increased by 12.0% from NT$2.9 billion in 2013 to NT$3.2 billion in 2014. The increase was mainly due to our expansion to the overseas market such as Japan, Hong Kong, Singapore, Thailand and Cambodia and the increased demand for our international leased line and VPN.

 

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Others

Other revenues accounted for 1.2% and 1.1% of our revenues in 2013 and 2014, respectively. Our other revenues decreased by 4.5% from NT$2.7 billion in 2013 to NT$2.5 billion in 2014. The decrease was mainly due to lower property sales by our subsidiary, Light Era Development Co., Ltd., and lower government-related ICT revenues by our subsidiary, Chunghwa System Integration Co., Ltd.

Operating Costs

Operating costs include depreciation and amortization expenses, personnel expenses, cost of goods sold, interconnection and service expenses, costs of materials and maintenance and spectrum usage and license fees.

Our operating costs increased by 0.7% from NT$147.3 billion in 2013 to NT$148.4 billion in 2014. This increase was primarily due to an increase of NT$1.9 billion in depreciation expense from 4G mobile broadband construction, 3G maintenance and cloud and IDC equipment investment, and amortization expense from the 4G mobile broadband license fee, and an increase of NT$1.3 billion in personnel expenses which resulted from voluntary retirement program and business expansion. The increase in our operating costs was partially offset by a decrease of NT$2.0 billion in interconnection and service expenses.

Operating Expenses

Our operating expenses increased by 3.0% from NT$33.1 billion in 2013 to NT$34.0 billion in 2014. This increase was primarily due to an increase in marketing expenses.

Marketing

Our marketing expenses, which include personnel expenses, expenses relating to advertising and marketing-related activities and provision for bad debt, increased by 3.9% from NT$25.2 billion in 2013 to NT$26.1 billion in 2014. This increase was primarily due to an increase in personnel expenses resulted from the increase of employees for our newly established subsidiary, Honghwa, and an increase of other expenses in marketing-related activities due to business expansion.

General and administrative

Our general and administrative expenses increased by 5.3% from NT$4.2 billion in 2013 to NT$4.4 billion in 2014. This increase was primarily due to the increase in personnel expenses which resulted from voluntary retirement program and other administrative activities for service centers and channel expansion.

Research and development

Our research and development expenses decreased by 5.3% from NT$3.7 billion in 2013 to NT$3.5 billion in 2014. This decrease was primarily due to the decrease in personnel expenses for research and development. In 2013 and 2014, we did not capitalize any research and development expenses as intangible assets because there were no research and development expenses related to development or the development phase of an internal project in 2013 and 2014.

Operating Costs and Expenses by Business Segment

 

    Domestic Fixed
Communications
    Mobile
Communications
    Internet     International
Fixed
Communications
    Other     Adjustment     Total  
    (in billions of NT$)  

For the year ended December 31, 2014

             

Operating costs and expenses

    72.6        96.9        21.3        17.5        8.5        (34.4     182.4   

Depreciation and amortization

    18.6        9.9        3.4        1.8        0.4        —          34.1   

For the year ended December 31, 2013

             

Operating costs and expenses

    75.0        92.4        20.4        17.0        7.4        (31.8     180.4   

Depreciation and amortization

    19.0        8.1        3.1        1.6        0.4        —          32.2   

 

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Domestic fixed communications

Our domestic fixed communications costs and expenses decreased by 3.2% from NT$75.0 billion in 2013 to NT$72.6 billion in 2014, primarily due to a decrease of NT$2.5 billion in interconnection expenses, and a decrease of NT$0.4 billion in depreciation expenses, and was partially offset by an increase of NT$0.8 billion in ICT costs.

Mobile communications

Our mobile communications operating costs and expenses increased by 4.9% from NT$92.4 billion in 2013 to NT$96.9 billion in 2014. This increase was primarily due to an increase of NT$1.8 billion in depreciation expense and amortization expense from 4G mobile broadband construction and license fee, an increase of NT$1.9 billion in leased lines and internet access expenses resulting from the increased leased lines and higher speed rate of our mobile internet services, an increase of NT$0.3 billion in personnel expense and an increase of NT$0.2 billion in electricity charge.

Internet

Our internet operating costs and expenses increased by 4.3% from NT$20.4 billion in 2013 to NT$21.3 billion in 2014. This increase was primarily due to an increase of NT$0.6 billion in international IP transit, an increase of NT$0.3 billion in depreciation expenses resulting from the increased cloud computing related facilities, and an increase of NT$0.2 billion in leased line expenses.

International fixed communications

Our international fixed communications costs and expenses increased by 2.7% from NT$17.0 billion in 2013 to NT$17.5 billion in 2014. The increase was primarily due to an increase of NT$0.5 billion in settlement payments for international long distance calls.

Others

The costs and expenses from our other business increased by 14.9% from NT$7.4 billion in 2013 to NT$8.5 billion in 2014. The increase was primarily due to an increase in pension cost resulted from voluntary retirement program, and increase of personnel cost and other cost and expenses from our subsidiaries, Chunghwa Precision Test Tech. Co., Ltd. and Honghwa.

Other Income and Expenses

We recorded net other income of NT$0.1 billion in 2013 and NT$0.6 billion in 2014, respectively. The difference between 2013 and 2014 was primarily due to the gain on disposal of investment properties of NT$0.6 billion in 2014 by our subsidiary, Light Era Development Co., Ltd.

Income from Operations and Operating Margin

As a result of the foregoing, our income from operations decreased by 6.0% from NT$47.7 billion in 2013 to NT$44.8 billion in 2014. Our operating margin decreased from 20.9% in 2013 to 19.8% in 2014.

 

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The following table sets forth certain information regarding our revenues and income before income tax by business segment for the periods indicated.

 

    Domestic Fixed
Communications
    Mobile
Communications
    Internet     International
Fixed
Communications
    Other     Adjustment     Total  
    (in billions of NT$)  

For the year ended December 31, 2014

             

Revenues from external customers

    72.1        110.7        26.0        15.3        2.5        —          226.6   

Intersegment service revenues

    19.7        5.3        4.7        2.3        2.4        (34.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    91.8        116.0        30.7        17.6        4.9        (34.4     226.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income before income tax

    19.5        19.3        9.6        0.2        (2.0     —          46.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2013

             

Revenues from external customers

    73.5        110.6        25.4        15.8        2.7        —          228.0   

Intersegment service revenues

    18.4        5.7        4.4        2.1        1.2        (31.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    91.9        116.3        29.8        17.9        3.9        (31.8     228.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income before income tax

    17.3        23.7        9.4        0.9        (2.2     —          49.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a result of the foregoing, segment income before tax for our domestic fixed communications business increased by 12.7% from NT$17.3 billion in 2013 to NT$19.5 billion in 2014; segment income before tax for our mobile communications business decreased by 18.4% from NT$23.7 billion in 2013 to NT$19.3 billion in 2014; segment income before tax for our internet business increased by 1.2% from NT$9.4 billion in 2013 to NT$9.6 billion in 2014; segment income before tax for our international fixed communications business decreased by 78.6% from NT$0.9 billion in 2013 to NT$0.2 billion in 2014; and segment loss for our other business segments decreased by 9.5% from NT$2.2 billion in 2013 to NT$2.0 billion in 2014.

Non-operating Income and Expenses

Our non-operating income increased from NT$1.4 billion in 2013 to NT$1.8 billion in 2014. This increase was primarily due to the increase in foreign currency exchange gains, income from Piping Fund, and share of the profit of associates and joint venture accounted for using equity method and was partially offset by a decrease in interest income.

Income Tax

Our income tax was NT$6.5 billion and NT$9.0 billion in 2013 and 2014, respectively. Our effective tax rate was 13.2% in 2013 and 19.3% in 2014. The increase of our effective tax rate from 2013 to 2014 was primarily due to an increase in the accrued 10% tax on unappropriated earnings. See “Item 5. Operating and Financial Review and Prospects—Overview—Taxation” for a discussion of the change in tax rate.

Net Income

As a result of the foregoing, our net income attributable to stockholders of the parent was NT$41.5 billion and NT$37.0 billion in 2013 and 2014, respectively. Our net margin decreased from 18.2% in 2013 to 16.3% in 2014.

 

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B. Liquidity and Capital Resources

Liquidity

The following table sets forth the summary of our cash flows for the periods indicated:

 

     Year Ended December 31  
     2013      2014      2015  
     NT$      NT$      NT$      US$  
     (in billions)  

Net cash provided by operating activities

     75.3         71.4         76.3         2.3   

Net cash used in investing activities

     (49.1      (27.3      (30.4      (0.9

Net cash used in financing activities

     (42.5      (35.1      (39.2      (1.2

Effect of exchange rate changes

     —           —           —           —     

Net increase (decrease) in cash and cash equivalents

     (16.3      9.0         6.7         0.2   

Cash and cash equivalents at end of year

     14.6         23.6         30.3         0.9   

Our primary source of liquidity is cash flow from operations, which represents operating profit adjusted for non-cash items, primarily depreciation and amortization and changes in current assets and liabilities. Notes 22 and 23 to our consolidated financial statements, included elsewhere in this annual report, provide additional details as to our bank loans. We believe that our working capital is sufficient to meet our present cash flow requirements.

In 2015, we generated NT$76.3 billion (US$2.3 billion) in net cash from operating activities as compared to NT$71.4 billion in 2014. The increase was primarily due to an increase in income from our operations, an increase in cash inflows from accounts receivables, an increase in amortization expense, and a decrease in cash outflows relating to income tax from operating activities.

In 2014, we generated NT$71.4 billion net cash from operating activities as compared to NT$75.3 billion in 2013. The decrease was primarily due to the decrease in income from operation, the decrease in cash inflows relating to accounts receivables, and the increase in cash outflows relating to income tax and other payables from operating activities.

In 2013, we generated NT$75.3 billion net cash from operating activities as compared to NT$65.6 billion in 2012. The increase was primarily due to the decrease in cash outflows relating to payment of employee bonuses and income tax, accounts payable from operating activities, and a NT$2.0 billion procurement of land by our property development subsidiary in 2012 for construction, which was further discussed in “Item 4. Information on the Company—B. Business Overview—Property, plant and equipment”.

Historically, net cash from operating activities has been sufficient to cover our capital expenditures, including ongoing expansion and modernization of our networks.

In 2015, net cash used in investing activities was NT$30.4 billion (US$0.9 billion), an increase from NT$27.3 billion in 2014. The change was primarily due to a one-time payment of NT$10.0 billion (US$0.3 billion) in 2015 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC, which payment was partially offset by a net decrease of NT$7.5 billion (US$0.2 billion) for acquisition of property, plant and equipment.

In 2014, net cash used in investing activities was NT$27.3 billion, a decrease from NT$49.1 billion in 2013. The change was primarily due to the one-time payment of NT$39.1 billion in 2013 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC, which was partially offset by a net decrease of NT$19.7 billion of time deposits and negotiable certificate of deposit with maturities of more than three months.

 

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In 2013, net cash used in investing activities was NT$49.1 billion, an increase from NT$18.6 billion in 2012. The increase was primarily due to the one-time payment of NT$39.1 billion in 2013 for acquiring the 4G mobile broadband spectrum in the auction held by the NCC.

In 2015, our net cash used in financing activities totaled NT$39.2 billion (US$1.2 billion), which mainly reflected NT$37.7 billion (US$1.1 billion) in dividends paid during that period.

In 2014, our net cash used in financing activities totaled NT$35.1 billion, which mainly reflected NT$18.5 billion of payment of dividends during that period and NT$16.6 billion of cash distribution from our capital surplus to our stockholders.

In 2013, our net cash used in financing activities totaled NT$42.5 billion, which mainly reflected NT$35.9 billion of payment of dividends during that period and NT$5.6 billion of cash distribution from our capital surplus to our stockholders.

Capital Resources

We have historically financed our capital expenditure requirements with our cash flows from operations and some bank loans. In future years, we have capital expenditure requirements for the ongoing expansion and upgrade of our networks, including 4G mobile broadband, FTTx, Wi-Fi and service platforms. We also expect to make dividend payments on an ongoing basis. See “Item 8. Financial Information—A”. Consolidated Statements and Other Financial Information”. Furthermore, we may require working capital from time to time to finance purchases of materials for our maintenance and other overhead expenses. We expect to primarily rely on cash generated from operations and, to a lesser extent, loans from commercial banks to meet our planned capital expenditures, make our planned dividend payments, repay debts and fulfill other commitments over the next twelve months.

As of December 31, 2015, our primary source of liquidity was NT$30.3 billion (US$0.9 billion) in cash and cash equivalents. In addition, the unused line of credit for unsecured and secured bank loans amounted to NT$41.3 billion (US$1.3 billion) and NT$0.2 billion (US$6.1 million), respectively, as of December 31, 2015.

As of December 31, 2015, our subsidiary, Chunghwa Sochamp Technology Inc., had short-term unsecured loans of NT$60.0 million (US$1.8 million) at interest rates ranging from 2.15% to 2.40%.

As of December 31, 2015, our subsidiary, CHIEF, had short-term unsecured loans of NT$50.0 million (US$1.5 million) at an interest rate of 1.29%.

As of December 31, 2015, our subsidiary, Light Era, had long-term secured loans in the amount of NT$1.6 billion (US$48.8 million) due in 2018 at an interest rate of 1.11%.

As of December 31, 2015, our subsidiary Chunghwa Precision Test Technology Co., Ltd., had a long-term secured loan of NT$0.1 billion (US$6.1 million) due in 2029 at an interest rate of 1.36%.

As part of the government’s effort to upgrade the existing telecommunication infrastructure, we and other public utility companies were required by the ROC government to contribute a total of NT$1.0 billion to a Piping Fund, administered by the Taipei City Government. This fund is used to finance various telecommunication infrastructure projects. We accounted for the contribution as other financial assets on our consolidated balance sheets.

Note 41 to our consolidated financial statements included elsewhere in this annual report provides a description of the assets that are pledged as collateral for long-term bank loans and contract deposits.

 

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Capital Expenditures

Substantially all of our capital expenditures in 2013, 2014 and 2015 were made for operations in the ROC. We have financed our capital expenditures using cash flow from operations and bank loans. The following table sets forth a summary of our capital expenditures for the periods indicated.

 

     Year Ended December 31  
     2013     2014     2015  
     (NT$ in billions, except percentages)  

Capital Expenditures:

               

Domestic fixed communications business

     20.4         56     16.2         50     10.2         41

Mobile communications business

     9.2         25        9.6         30        8.6         34   

Internet business

     4.6         13        4.4         14        4.8         19   

International fixed communications business

     1.6         4        1.5         4        1.0         4   

Others

     0.6         2        0.9         2        0.5         2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total capital expenditures

     36.4         100     32.6         100     25.1         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table sets forth a summary of our planned capital expenditures for the year ending December 31, 2016.

 

     Year Ending
December 31,
2016
 
    

(NT$ in billions,

except percentages)

 

Capital Expenditures:

     

Domestic fixed communications business

     12.6         41.3

Mobile communications business

     9.4         30.8   

Internet business

     5.6         18.2   

International fixed communications business

     2.2         7.1   

Others

     0.8         2.6   
  

 

 

    

 

 

 

Total capital expenditures

     30.6         100.0
  

 

 

    

 

 

 

We expect our total capital expenditures to be approximately NT$30.6 billion in 2016. Our capital expenditures for 2016 are planned to be allocated to our 4G LTE network deployment, FTTx network expansion, service platforms, cloud computing, including cloud data center construction and submarine cables. We expect to finance these capital expenditures with our cash flows from operations and bank loans.

Inflation

We do not believe that inflation in Taiwan has had a material impact on our results of operations in 2013, 2014 and 2015.

Recent Accounting Pronouncements

Major differences between IFRSs and Taiwan IFRSs

See “Item 3. Key Information—A. Selected Financial Data” for description about the adoption of Taiwan IFRSs. While we have adopted Taiwan IFRSs for ROC reporting purposes, we adopt IFRSs for certain filings with the SEC, including our annual reports on Form 20-F for the year ended December 31, 2013 and thereafter. Following our adoption of IFRSs for SEC filing purposes, we are no longer required to prepare any reconciliation of our consolidated financial statements with U.S. GAAP.

 

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Taiwan IFRSs differs from IFRSs in certain significant respects, including to the extent that any new or amended standards or interpretations applicable under IFRSs may not be timely endorsed by the FSC. For example, as of the date of this annual report, the FSC has not endorsed any accounting pronouncements issued by the International Accounting Standards Board after January 1, 2014. Therefore, these pronouncements will not be applicable to Taiwan IFRSs until endorsed by the FSC. Some of the major differences between IFRSs and Taiwan IFRSs that are relevant to us as of the date of this annual report are set forth below.

 

    The “income taxes on unappropriated earnings” should be recognized at the year of earnings under IFRSs, while it should be recognized at the year of distribution under Taiwan IFRSs.

 

    Prior to incorporation, according to the laws and regulations applicable to state-owned enterprises in Taiwan, we recorded revenue from fixed-line service at the time the connection service was performed or the prepaid card was sold. Upon incorporation, net assets greater than capital stock was credited as additional paid-in capital. Part of our additional paid-in capital was from unearned revenues from fixed-line services as of that date. Under IFRSs, following the revenue recognition guidance, the above service revenue should be treated as deferred income and recognized over the time when the service is continuously provided or as consumed. Therefore, upon our first adoption of IFRSs, we should retrospectively decrease additional paid-in capital while increase unappropriated earnings on the transition date of January 1, 2012. There is no difference in the recognition of unearned revenues or deferred income between IFRSs and Taiwan IFRSs. However, according to the guidance released by the TWSE in March 2012, which is a part of Taiwan IFRSs, the additional paid-in capital under ROC GAAP that is not specifically promulgated under Taiwan IFRSs should not be adjusted on the transition date of January 1, 2012. Therefore, we retain such additional paid-in capital under Taiwan IFRSs.

It is difficult for us to evaluate the precise impact of the adoption of Taiwan IFRSs and IFRSs on our financial statements, because the FSC may issue new rules governing the adoption of Taiwan IFRSs and as other laws and regulations may be amended with the adoption of Taiwan IFRSs.

Other recent accounting pronouncements under IFRSs

For a summary of new standards, amendments and interpretations issued under IFRSs but not effective for 2015 and which have not been adopted early by us, see Note 5 to our consolidated financial statements included elsewhere in this annual report.

C. Research and Development, Patents and Licenses

Research and Development

Our research and development efforts are focused on the development of advanced network services and operation technologies as well as the development of core technologies for the domestic telecommunications market. For 2013, 2014 and 2015, our research and development expenses were NT$3.7 billion, NT$3.5 billion and NT$3.6 billion (US$0.1 billion), or approximately 1.6%, 1.5% and 1.6% of our revenues, respectively.

As of March 31, 2016, we had 2,276 researchers focusing on the following areas:

 

    SDN or network function virtualization technology and services;

 

    Enterprise cloud management solutions;

 

    High speed fixed broadband networks;

 

    Mobile broadband intelligent networks and services;

 

    IoT solutions;

 

    Ultra broadband or high pixel density video services; and

 

    Digital identity and enterprise security.

 

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With our consistent investment in research and development, we have developed a number of advanced network services, operation technologies and VAS which successfully support our business operations and expansion, including our FTTx deployment, security, mobile payment, smart Home, enterprise ICT solution, cloud business and operation supporting system, and various IoT services, such as ITS, iEN, intelligent video surveillance, or IVS, and the solution of industry 4.0. As of December 31, 2015, we have been granted 747 domestic patents and 63 foreign patents.

D. Trend Information

See “—Overview” for a discussion of the most significant recent trends that have had, and in the future may have, a material impact on our results of operations, financial condition and capital expenditures. In addition, see discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably likely to have a material effect on our net operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

E. Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that are material to investors.

F. Tabular Disclosure of Contractual Obligations

Set forth below are our total contractual obligations as of December 31, 2015.

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3 years      3-5 years      More than
5 years
 
     (NT$ in billions)  

Contractual Obligations(1)

              

Short-term loans

     0.1         0.1         —           —           —     

Long-term loans

     1.7         —           1.6         —           0.1   

Obligations related to ST-2 satellite

     2.0         0.2         0.4         0.4         1.0   

Operating leases(2)

     10.0         3.2         4.0         1.6         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13.8         3.5         6.0         2.0         2.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Unfunded defined benefit obligation is not included as the schedule of payments is difficult to determine. We made pension contributions of approximately NT$2.4 billion (US$0.1 billion) in 2015 and expected to made pension contributions of approximately NT$11.3 billion (US$0.3 billion) in 2016. See Note 28 to our consolidated financial statements for additional details regarding our pension plan.
(2) Operating leases obligations are described in Note 36 to our consolidated financial statements included elsewhere in the annual report.

As of December 31, 2015, we had remaining commitments under non-cancelable contracts with various parties, including acquisition of lands and buildings of NT$0.6 billion (US$19.7 million) and acquisition of telecommunications equipment of NT$14.0 billion (US$0.4 billion).

Foreign Exchange

Our revenues and costs and expenses are largely denominated in NT dollars. Our principal expenses denominated in foreign currencies are capital expenditures on telecommunications equipment and settlement payments for the use of networks of carriers in foreign countries for outgoing international calls. Settlement receipts have been a principal source of foreign currency for us. While future fluctuations of the NT dollar against foreign currencies could impact our financial condition and results of operations, we have not yet been materially affected in the past.

 

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G. Safe Harbor

See “Forward-Looking Statements in This Annual Report May Not Be Realized.”

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Our articles of incorporation provides for a board of directors consisting of seven to fifteen directors bestowed with a three-year tenure. The following table sets forth the name, age and position of each of our directors and such person’s position as of March 31, 2016. There is no family relationship among any of these persons. These directors have terms until June 24, 2016. Pursuant to the ROC Company Act, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. All of our non-independent directors are representatives of the MOTC.

 

Name

   Age     

Position

Lih-Shyng Tsai

     65       Chairman, chief executive officer and director

Mu-Piao Shih

     63       President and director

Yu-Fen Hong

     59       Director

Yi-Bing Lin

     55       Director

Chung-Yu Wang(1)

     71       Director

Zse-Hong Tsai(1)

     55       Director

Chung-Fern Wu(1)

     59       Director

Shih-Peng Tsai

     67       Director

Su-Ghen Huang

     51       Director

Tain-Jy Chen(1)

     63       Director

Yun-Tsai Chou(1)

     48       Director

Chih-Ku Fan

     62       Director

Chich-Chiang Fan

     65       Director

 

(1) Independent director.

Lih-Shyang Tsai is the chairman, chief executive officer and director of our company starting January 28, 2014. Dr. Tsai is also a director of NXP Semiconductors N.V. and a director of USI Corporation. Dr. Tsai was the chairman and chief executive officer of TSMC Solar Ltd. and TSMC Solid State Lighting Ltd. from 2011 to 2013, and the president of TSMC’s new business department from June 2009 to July 2011. Dr. Tsai holds a Ph.D. degree in Material Science and Engineering from Cornell University.

Mu-Piao Shih is the president and director of our company. Mr. Shih served as a senior executive vice president of our company from August 2011 to April 1, 2013, an executive vice president of our company and the manager of our Mobile Business Group from September 2009 to August 2011, an assistant vice president and a deputy manager of our Mobile Business Group from March 2005 to September 2009, and the senior chief engineer of our Mobile Business Group from October 2001 to March 2005. Mr. Shih holds a master’s degree in Electronic Engineering from the National Taiwan University.

Yu-Fen Hong is a director of our company. Ms. Hong is currently the director of the accounting department at the MOTC. She holds an MBA degree from the National Chiao Tung University in Taiwan.

Yi-Bing Lin is a director of our company. Dr. Lin is the political deputy minister of Ministry of Science and Technology of the Executive Yuan. He holds a Ph.D. degree in Computer Science and Engineering from the University of Washington in Seattle.

 

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Chung-Yu Wang is currently an independent director of our company and also the former chairman of China Steel Corporation. He is also an independent director of CTBC Bank Co., Ltd., an independent director of CTBC Financial Holding Co., Ltd. and a director of Harmony Biotech Co., Ltd. He graduated from Chung Yuan Christian University with a bachelor’s degree in Chemical Engineering. Mr. Wang received a certificate of senior management course from Harvard Business School.

Zse-Hong Tsai is an independent director of our company. Dr. Tsai is also currently a professor of electrical engineering at the National Taiwan University. His research interest includes broadband networking, performance evaluation and telecommunication regulations. Dr. Tsai holds a Ph.D. degree and a master’s of science degree in Electrical Engineering from the University of California, Los Angeles, and a bachelor’s of science degree in Electrical Engineering from the National Taiwan University.

Chung-Fern Wu is an independent director of our company. Dr. Wu is also a director of the Taipei Exchange (formerly known as Gre Tai Securities Market), a director of Taiwan Cooperative Financial Holding Co., Ltd. and an independent director of Taiwan Sugar Corporation. Dr. Wu is also currently a professor of Accounting at the National Taiwan University. She holds an MBA degree in finance and a bachelor’s degree in accounting from the National Taiwan University. She started her career as a practicing CPA in Taiwan and a Systems Analyst in U.S.A. She started her academic career as an assistant professor in the Fisher School of Accounting, University of Florida after receiving her Ph.D. degree in Accounting and Information Management from the Anderson Graduate School of Management, University of California, Los Angeles.

Shih-Peng Tsai is a director of our company. Mr. Tsai is currently a representative of the Member’s Convention of the Chunghwa Telecom Workers Union. Mr. Tsai graduated from Ta Tung Junior Technological College of Commerce.

Su-Ghen Huang is a director of our company. Ms. Huang is also currently the director of the Department of Planning of the Directorate General of Budget, Accounting and Statistics at the Executive Yuan. Ms. Huang served as our supervisor before June 25, 2013. Ms. Huang holds a bachelor’s degree in Accounting from the Furen University in Taiwan.

Tain-Jy Chen is an independent director of our company. Dr. Chen is also an independent director of TECO Electric and Machinery Co., Ltd., an independent director of AU Optronics Corp. and an independent director of MediaTek Inc. Dr. Chen is currently a professor of Department of Economics at the National Taiwan University. He was the Minister of Council for Economic Planning and Development from 2008 to 2009 and the President of Chung-Hua Institution for Economic Research from 2002 to 2005. Dr. Chen holds a Ph.D. degree in Economics from Pennsylvania State University, University Park, U.S.A.

Yun-Tsai Chou is an independent director of our company. Dr. Chou currently directs research and development for five research centers at the public policy think tank 21st Century Foundation: Digital Convergence, Bio-Agriculture, Global Health, Innovative Governance, and Knowledge Economy. She is currently a professor in the Department of Information Management at the Yuan Ze University in Taiwan. Dr. Chou holds a Ph.D. degree in Public Policy from George Washington University, U.S.A.

Chih-Ku Fan is a director of our company. Mr. Fan is also currently the deputy administrative minister of the MOTC. Mr. Fan holds a Ph.D. degree in transportation technology and management from the National Chiao Tung University in Taiwan.

Chich-Chiang Fan is a director of our company. Dr. Fan assumed chairmanship of Yuanta Commercial Bank Company Ltd. starting from March 2015, after his term as the chairman of Taiwan High Speed Rail Corporation from 2014 to 2015. Dr. Fan is also the chairman of Taiwan Futures Exchange starting from July 2010, after his term as the chairman of the Taiwan Depository & Clearing Corporation from 2008 to 2010. From 2001 to 2008, he was the chairman of TransAsia Airways Corporation, and chaired the Association of Airfreight

 

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Forwarding & Logistics from 2005 to 2008. He was also the chairman of Askey Computer Corp. from 2001 to 2006. From 1997 to 2001, he served as the chairman of the Fuhwa Securities Corp. Dr. Fan received a Ph.D. degree from the University of Cambridge, UK, in 1993.

The following table sets forth the name, age and position of each of our executive officers and such person’s position as of March 31, 2016. There is no family relationship among any of these persons.

 

Name

   Age     

Position

Bo-Yung Chen

     52       Chief financial officer and senior executive vice president

Chi-Mau Sheih

     61       Senior executive vice president

Hsiu-Gu Huang

     62       Senior executive vice president

Fu-Kuei Chung

     62       Senior executive vice president

Yuan-Kuang Tu

     60       President of business group

Ming-Yuan Lee

     64       President of business group

Kuo-Feng Lin

     60       President of business group

Ming-Ching Cheng

     64       President of business group

Shyang-Yih Chen

     63       President of business group

Hong-Chan Ma

     59       President of business group

Bo-Yung Chen is our chief financial officer and senior executive vice president starting from May 2014. Mr. Chen is also a director of Senao International Co., Ltd. He served as the chief financial officer of TSMC Solid State Lighting from 2012 to 2014. Prior to that, he was the chief financial officer and the operation general manager of Ralink Technology Corp. from 2008 to 2011. He also served as the senior vice president of Silicon Integrated Systems Corp. from 2004 to 2008. Mr. Chen holds a master’s degree in Business Administration from University of Pittsburgh.

Chi-Mau Sheih is a senior executive vice president. Mr. Sheih is also a director of Senao International Co., Ltd. Mr. Sheih was an executive vice president and the manager of our Southern Taiwan Business Group from March 2007 to June 2010. Prior to that, he was an executive vice president of our company and the manager of our Central Taiwan Business Group from September 2006 to March 2007, and an assistant vice president of our company and a deputy manager of our Central Taiwan Business Group from January 2004 to September 2006. Mr. Sheih holds a master’s degree in Business Administration from the National Taiwan University.

Hsiu-Gu Huang is a senior executive vice president. Mr. Huang is also a director of China Airlines Co., Ltd. He served as the president of our Enterprise Business Group from September 2008 to May 2013, and an assistant vice president of our company and a deputy manager of our Enterprise Business Group from January 2007 to September 2008. Mr. Huang holds a master’s degree in Management Science from the National Chiao Tung University in Taiwan.

Fu-Kuei Chung is a senior executive vice president. Before being promoted to this position, he previously served as the president of our Data Communications Business Group from March 2012 to August 2015, a deputy manager of our Data Communications Business Group from September 2010 to March 2012, and the senior managing director of our Corporate Planning Departing from May 2009 to August 2010. Mr. Chung holds the master’s degree in Information Management from National Taiwan University.

Yuan-Kuang Tu is the president of our Enterprise Business Group and concurrently is the president of the International Business Group of our company. Dr. Tu served as the president of Northern Taiwan Business Group from March 2012 to February 2015, the president of Chunghwa Telecom Laboratories from May 2009 to March 2012, the senior managing director of our Corporate Planning Department from May 2007 to May 2009, and a vice president of Chunghwa Telecom Laboratories from March 2006 to April 2007. Dr. Tu holds a Ph.D. degree in Electrical Engineering from National Taiwan University.

Ming-Yuan Lee is the president of our Southern Taiwan Business Group since November 2013. Prior to that, he served as a vice president of our Southern Taiwan Business Group from July 2012 to November 2013

 

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and as the deputy manager of our Southern Taiwan Business Group from May 2007 to July 2012. Mr. Lee holds a master’s degree in Telecommunications from the National Chiao Tung University in Taiwan.

Kuo-Feng Lin is the president of our Mobile Business Group. Mr. Lin is also a director of Next Generation Mobile Networks Ltd. Mr. Lin served as a deputy manager of our Mobil business group from October 2009 to May 2012. Prior to that, he served as the manager of Taipei Branch, Mobile Business Group from April 2006 to October 2009. Mr. Lin holds a bachelor’s degree in Electronic Engineering from National Taipei Institute of Technology.

Ming-Ching Cheng is the president of our Northern Taiwan Business Group. Mr. Cheng is also a director of Senao International Co., Ltd. Before being promoted to this position, Mr. Cheng served as a vice president of Mobile Business Group from July 2012 to February 2015. Mr. Cheng holds a bachelor’s degree in Electrical Engineering from the Provincial Kaohsiung Institute of Technology.

Shyang-Yih Chen is the president of our Telecommunication Laboratories and concurrently is the president of our Telecommunication Training Institute. Mr. Chen served as a senior executive vice president of our company from August 2014 to August 2015, the president of our Telecommunication Training Institute from March 2012 to August 2014, and an executive vice president of our company and the president of the Data Communication Business Group from September 2006 to March 2012. Mr. Chen holds a master’s degree in Electrical Engineering from National Taiwan University.

Hong-Chan Ma is the president of our Data Communications Business Group. Before being promoted to this position, Mr. Ma served as the vice president of our Marketing Department from September 2012 to August 2015. Mr. Ma holds a master’s degree in Management Science from the National Chiao Tung University in Taiwan.

The following person served as our executive officer during 2015 but is no longer serving with us due to replacement.

Feng-Yue Hung was the president of our Telecommunication Laboratories. Mr. Hung served as the president of our Telecommunication Training Institute from December 2010 to March 2012. Mr. Hung holds a master’s degree in Electronic from National Chiao Tung University.

B. Compensation

The board of directors has set up a compensation committee to be responsible for drafting, approving and periodically reviewing the compensation proposals for the directors and managers. See “C. Board Practices” for a discussion of our compensation committee.

 

    the chairman of our board of directors may receive a fixed monthly income of NT$342,900 and a non-fixed income, including but not limited to performance-related bonuses or other rewards, which may not exceed his fixed income. The chairman will not receive any additional compensation for his role as a director;

 

    our president may receive a fixed monthly income of NT$335,250 and a non-fixed income, including but not limited to performance-related bonuses or other rewards, which may not exceed his fixed income. The president will not receive any additional compensation for his role as a director;

 

    independent directors who concurrently serve in military, public office or hold teaching or administrative post may receive a fixed monthly compensation of NT$8,000, and those who do not concurrently serve in military or public office or hold teaching or administrative post may receive a monthly compensation of NT$60,000; and

 

    directors who serve in military, public office or hold teaching or administrative post may receive a monthly compensation of NT$8,000, and those directors who do not serve in military and public office or hold teaching or administrative post may receive a monthly compensation of NT$30,000.

 

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Any compensation above the stipulated amounts in the compensation plan for our directors, including but not limited to profit-based bonuses, received by our directors who are serving as representatives of the MOTC or other legal persons will be collected by the MOTC or the legal persons they represent, respectively. Our chairman and president to our board of directors, Lih-Shyng Tsai and Mu-Piao Shih, respectively, do not receive monthly compensation for acting as our directors because they receive salaries as employees.

The aggregate amount of compensation to our directors and executive officers in 2013, 2014 and 2015 was NT$108,996,925, NT$152,242,029 and NT$126,799,952 (US$3,867,031), respectively. The aggregate amount of compensation in 2015 includes a NT$71,724,889 (US$2,187,401) salary payment for directors and executive officers, a NT$4,653,280 (US$141,912) pension payment for executive officers, a NT$44,851,783 (US$1,367,849) bonus accrued for directors and a NT$30,118,331 (US$918,521) bonus accrued for executive officers. See “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Dividends and Distributions” for a discussion of the distribution of bonuses and earnings.

All of our non-independent directors are legal representatives of the MOTC. The bonus in the amount of NT$39,222,554 (US$1,196,174) were paid directly to the MOTC in 2015 because such earnings distributions are not the individual income of these directors. Independent directors will not receive any earnings distributions.

Pursuant to ROC disclosure rules, we have disclosed the compensation range of our directors and senior management for the fiscal year ended December 31, 2015 as follows, excluding bonus accrued for legal entities:

 

Total Compensation

  

Directors

Below NT$2,000,000

   Yu-Fen Hong, Yi- Bing Lin, Zse-Hong Tsai, Chung-Yu Wang, Chung-Fern Wu, Shih-Peng Tsai, Su-Ghen Huang, Tain-Jy Chen, Yun-Tsai Chou, Chich-Chiang Fan, Jian-Yu Chen(3), Chih-Ku Fan

NT$2,000,000 to NT$4,999,999

   None

NT$5,000,000 to NT$9,999,999

   Lih-Shyng Tsai(1), Mu-Piao Shih(2)

Total

   14 people

 

(1) As salary for serving as our chief executive officer.
(2) As salary for serving as our president.
(3) This person has ceased to be a director of our Company due to replacement in February 2015.

 

Total Compensation

  

Senior Management

Below NT$2,000,000

   None

NT$2,000,000 to NT$4,999,999

   Bo-Yung Chen, Chi-Mau Sheih, Hsiu-Gu Huang, Yuan-Kuang Tu, Ming-Yuan Lee, Kuo-Feng Lin, Fu-Kuei Chung, Shyang-Yih Chen, Hong-Chan Ma, Feng-Yue Hung(2), Ming-Ching Cheng

NT$5,000,000 to NT$9,999,999

   Kuang-Yao Chang(1)(3)

Total

   12 people

 

(1) Including retirement pension payment.
(2) This person has ceased to be a member of our senior management of our Company due to replacement in August 2015.
(3) This person has ceased to be a member of our senior management of our Company due to retirement in March 2015.

We accrued NT$5,498,852 (US$167,699.1) pension expense for executive officers mentioned above in 2015. See “Item 5. Operating and Financial Review and Prospects—Overview—Personnel expenses” and Note 28 to our consolidated financial statements included elsewhere in this annual report for descriptions about our pension plans. We do not have any service contracts with any directors providing for any benefits upon termination of employment.

 

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C. Board Practices

Thirteen directors were elected in 2013 for three-year terms. Pursuant to the ROC Company Act, the directors may be removed from office at any time by a resolution adopted at a stockholders’ meeting. The chairman of our board of directors is elected by our directors. Our chairman presides at all meetings of our board of directors and also has the authority to act as our representative. We have not entered into any contract with any of our directors by which our directors are expected to receive benefits upon termination of their employment. Under the Article 12 of our articles of incorporation, our supervisors has been replaced by an audit committee, which is composed entirely of independent directors, starting from our 7th term of board of directors to be elected at our 2013 annual general stockholders’ meeting, pursuant to Paragraph 1, Article 14-4 of the Securities and Exchange Act. We no longer have supervisors after the beginning of our 7th term of our board of directors.

Our articles of incorporation provides for a board of directors consisting of seven to fifteen directors, one-fifth of whom shall be expert representatives. Pursuant to the ROC Company Act, the ROC Securities and Exchange Act and Article 12-1 of our articles of incorporation provides for the election of, starting from the fifth stockholders’ meeting, at least three independent directors out of the 7-to-15-member board. The term “independent director” may have a different meaning when used in Taiwan than in other jurisdictions. We have used a nominating process, with the stockholders choosing the independent directors from the list of nominees. Accordingly, we have elected five independent directors in the annual general meeting on June 25, 2013. With respect to certain material decisions to be made by our company as specified in the ROC Securities and Exchange Act, including the adoption or amendment to our internal control system, material loans or guarantees, the issuance of equity-type securities, matters in which directors have personal interests, the appointment and discharge of auditors, approval of financial reports, the appointment and discharge of financial, accounting or internal auditing officers and other matters prescribed by the ROC FSC, the dissenting opinion or qualified opinion of an independent director is required to be noted in the minutes of the board of directors’ meeting.

Our audit committee was established in September 2004 in accordance with the rules set forth in the NYSE Listed Company Manual, and was comprised of three independent directors. See “Item 16G. Corporate Governance—Audit Committee”. Starting from the date of the annual general meeting in June 2013, we have established a new audit committee that replaces our supervisors and our old audit committee in accordance with Paragraph 1, Article 14-4 of the ROC Securities and Exchange Act and our articles of incorporation, and as a result, we simultaneously comply with the relevant rules of the NYSE Listed Company Manual and the relevant rules and regulations in the ROC. Therefore, we no longer have supervisors after the beginning of our 7th term of our board of directors. In addition, the number of members, or independent directors, in the audit committee, increases from three to five according to the resolution of our board meeting.

Under the ROC Company Act, a person may serve as our director in his personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Except for our five independent directors, all of our directors are representatives of the MOTC.

The business address of our directors and executive officers is the same as our registered address.

Our audit committee should approve and deal following matters: (i) the adoption or amendment of the internal control system pursuant to Article 14-1 of the Securities and Exchange Act; (ii) the assessment of the effectiveness of the internal control system; (iii) the adoption or amendment, pursuant to Article 36-1 of the Securities and Exchange Act, of procedures governing material financial or operational actions, such as acquisition or disposal of assets and derivatives trading, loaning of funds to others, and endorsements or guarantees for others; (iv) a matter relating to the personal interest of a director; (v) a material asset or derivatives transaction; (vi) the offering, issuance, or private placement of any equity-related securities; (vii) a matter relating to significant loan, endorsement or guarantee arrangement; (viii) the designation or dismissal of an

 

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attesting CPA, or the compensation given thereto; (ix) the appointment or discharge of a financial, accounting, or internal auditing officer; (x) annual and semi-annual financial reports; (xi) the first and third quarter financial reports; (xii) communicating with our independent auditor; (xiii) negotiating the conflicts over our financial reports between our management and independent auditor; (xiv) discussing and reporting other financial information and required disclosure under the Securities Exchange Act of 1934 with our management and independent auditor; (xv) accounting firm’s annual audit and non-audit service items; (xvi) performing one-self review each year; (xvii) evaluating the fairness and rationality of merger and acquisition transactions; and (xviii) any other material matter so required by the Company or the competent authorities. Our board of directors has concluded that Chung-Fern Wu is our audit committee financial expert.

In addition to our audit committee, we also have a corporate strategy committee. Our corporate strategy committee may be composed of five to seven directors. Currently, there are six directors in the Committee. It is responsible for reviewing and advising on the budgets, capital requirements, financial forecasts, matters related to investments, business license matters, corporate reorganization, development plans and other major issues affecting our development. The conclusions of the corporate strategy committee are considered at a subsequent board of directors meeting.

The board of directors passed a resolution on November 8, 2005 to set up a compensation committee. The Article 14-6 of ROC Securities and Exchange Act requires all listed companies to establish a compensation committee for directors, supervisors and managers’ compensation, which includes salary, stock options and other rewards, as well as authorizes the Competent Authority (i.e., FSC) to enact a regulation on the authorities of the compensation committee and the qualifications of its members. Our board of directors passed a resolution to amend the organization of our compensation committee on August 13, 2013. The compensation committee is composed of three independent directors (Chung-Yu Wang, Chung-Fern Wu and Tain-Jy Chen) and is responsible for drafting, approving and periodically reviewing the compensation proposals for the directors and managers. See “Item 10. Additional Information—B. Memorandum and Articles of Incorporation—Directors and Audit Committee”.

In November 2003, the SEC approved changes to the NYSE’s listing standards related to the corporate governance practices of listed companies. Under these rules, listed foreign private issuers, like us, must disclose any significant ways in which their corporate governance practices differ from those followed by NYSE-listed non-foreign private issuers under the NYSE’s listing standards. See “Item 16G. Corporate Governance”. A copy of the significant differences between our corporate governance practices and NYSE corporate governance rules applicable to non-foreign private issuers is also available on our website http://www.cht.com.tw. The information contained on our website is not a part of this annual report.

D. Employees

The following section sets forth information regarding the employees.

As of December 31, 2015, we had 32,734 employees on a consolidated basis. Approximately 99% of our employees were based in the ROC. The following table is a breakdown of our employees from 2013 to 2015 on a consolidated basis.

 

     2013      2014      2015  

Employees

        

Technical

     15,177         15,217         15,467   

Operations

     15,267         15,640         15,558   

Administrative

     1,743         1,739         1,709   
  

 

 

    

 

 

    

 

 

 

Total

     32,187         32,596         32,734   
  

 

 

    

 

 

    

 

 

 

 

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The following table is a breakdown of our employees of Chunghwa Telecom Co., Ltd. from 2013 to 2015.

 

     2013      2014      2015  

Employees

        

Technical

     13,951         13,773         13,540   

Operations

     8,958         8,464         8,312   

Administrative

     1,313         1,298         1,289   
  

 

 

    

 

 

    

 

 

 

Total

     24,222         23,535         23,141   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2015, approximately 76.34% of our employees of Chunghwa Telecom Co., Ltd. had university, graduate or post-graduate degrees. To improve our operational efficiency by reducing personnel costs, we offered a number of voluntary retirement programs between June 1, 2000 and December 31, 2014, which resulted in a reduction of approximately 14,386 employees.

As of December 31, 2015, approximately 99% of our employees on a non-consolidated basis were members of our principal labor union. Our collective agreement sets forth work rules, grievance procedures and provides for union participation in performance evaluations and promotion decisions. Our union members also occupy a majority of the seats on our employee welfare and pension fund committees. We will continue to maintain a good relationship with our labor union. We strive to have good communication with our employees and the labor union by inviting representatives of our labor union to attend various meetings related to the performance of our employees.

Pursuant to our articles of incorporation, our employees are entitled to 2% to 5% of the distributable earnings as employee bonuses. Our practice in the past to determine the amount of the bonus has been based on the operating results. In the third quarter of 2015, we distributed an aggregate bonus to our employees of NT$1.5 billion (US$46.1 million).

 

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E. Share Ownership

As of March 31, 2016, our directors and executive officers personally held an aggregate 841,996 shares of our common shares, representing around 0.01% of our outstanding common shares. The following table sets forth information with respect to the beneficial ownership of our common shares as of March 31, 2016 by each of our directors and executive officers.

 

Name

   Number      %  

Lih-Shyng Tsai

     400,000         *   

Mu-Piao Shih

     71,218         *   

Yu-Fen Hong

     —           —     

Yi-Bing Lin

     —           —     

Chung-Yu Wang

     —           —     

Zse-Hong Tsai

     —           —     

Chung-Fern Wu

     —           —     

Shih-Peng Tsai

     15,961         *   

Su-Ghen Huang

     —           —     

Tian-Jy Chen

     25,768         *   

Yun-Tsai Chou

     —           —     

Chih-Ku Fan

     —           —     

Chih-Chiang Fan

     —           —     

Bo-Yung Chen

     —           —     

Chi-Mau Sheih

     72,054         *   

Shyang-Yih Chen

     78,840         *   

Hsiu-Gu Huang

     18,698         *   

Yuan-Kuang Tu

     81,305         *   

Ming-Yuan Lee

     5,188         *   

Kuo-Feng Lin

     42,771         *   

Fu-Kuei Chung

     19,093         *   

Ming-Ching Cheng

     11,100         *   

Hong-Chan Ma

     —           —     

 

* Stockholder beneficially owns less than 1.0% of our outstanding common shares.

Employee Stock Subscription Program

Under our articles of incorporation, we must reserve up to 10% to 15% of any new shares for subscription by our employees whenever we issue new shares for cash, unless otherwise approved by the central competent authority.

Our consolidated subsidiary, Senao, is publicly traded on the TWSE and resolved to grant the stock options plan for its employees to purchase common stock of Senao. As of December 31, 2013, 2014 and 2015, participants in Senao’s stock incentive plan had outstanding stock options to purchase 9.9 million, 9.0 million and 7.8 million common shares of Senao, respectively.

In 2015, our consolidated subsidiary, CHIEF, which has been a public company since November 17, 2015, granted stock options to its employees entitling them to purchase common stock of CHIEF. As of December 31, 2015, participants in CHIEF’s stock incentive plan had outstanding stock options to purchase 2.0 million common shares of CHIEF.

Our another consolidated subsidiary, Chunghwa Precision Test Tech Co., Ltd., or CHPT, which was listed on the General Stock Market of the Taipei Exchange (formerly known as Gre Tai Securities Market) since March 24, 2016, granted stock options to its employees to subscribe for common shares of CHPT in December 2008. As of December 31, 2013, 2014 and 2015, CHPT has no outstanding employee stock options.

 

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ITEM 7. MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Stockholders

The following table sets forth information known to us with respect to the beneficial ownership of our shares (i) as of March 31, 2016, the most recent practicable date and (ii) as of certain book closure dates in each of the preceding three years, for the stockholders known by us to own at least 5.0% of our outstanding common shares. Beneficial ownership is determined in accordance with the SEC’s rules.

 

<
     As of March 31, 2013      As of March 31, 2014      As of March 31, 2015      As of March 31, 2016  

Name

   number      %      number      %      number      %      number      %  

The ROC government(1)(2)

     3,000,346,630         38.68         3,099,602,788         39.96         3,095,559,716         39.90         3,123,092,684         40.11   

The MOTC

     2,737,718,976         35.29         2,737,718,976         35.29         2,737,718,976         35.29         2,737,718,976         35.29   

Fubon Life Assurance Co., Ltd(2)

     467,321,087         6.02         450,471,087         5.81         449,451,087         5.79         449,451,087