Taiwan's Next Step in Chunghwa Telecom

UNCLAS SECTION 01 OF 03 TAIPEI 001409

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR SCOTT KI

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
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TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON TW
SUBJECT: Taiwan's Next Step in Chunghwa Telecom
Privatization mid-2005


SUMMARY
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1. Taiwan Premier Frank Hsieh has revived Taiwan's stalled
privatization plans by ordering the sale of another 17% of
government equity in Chunghwa Telecom Company (CTC),
Taiwan's largest telecomm firm. The planned transaction
will reduce government ownership in CTC to below 50%.
Revenue from the sale will make a one-time contribution be
used to supplement bond issuances to help reduce the 2005
budget deficit. Underwriters, investment bankers, and most
economists welcome the plan, but it is strongly opposed by
Chunghwa's labor unions. END SUMMARY.

Privatization
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2. Taiwan's accession to the WTO in 2002 brought with it a
commitment to undertake privatization of its many state-
owned enterprises. Starting in the late 1990s, Taiwan began
the CTC privatization process by separating CTC from the
Ministry of Transportation and Communications. The next
planned stage, in 2001, failed as strong opposition from
labor, coupled with support from Legislative Yuan (LY)
members, stopped the planned public sale of a portion of
government ownership of CTC. Revisiting the program in
2003, the government sold off just over 35% of its equity in
CTC.


3. In early March 2005, Premier Frank Hsieh instructed the
Ministry of Transportation and Communications (MOTC) to move
to the next stage of privatization and sell an additional
17% of government equity by mid-2005. This would reduce
government ownership from 64.89% to 47.89%,
making CTC a private firm according to Taiwan's definition
of "state-ownership." As a private company, CTC would no
longer be subject to supervision by the Legislative Yuan
(LY) and its chairman would no longer be required to report
to the LY. However, CTC would, of course, still be under
the control of Taiwan's telecom laws and regulations.

Largest Secondary Offering
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4. The CTC sale could generate about US$3.4 billion (or
NT$105 billion at the current exchange rate of NT$30.9 per
US dollar) and would be the island's largest secondary share
offering ever. Analysts expect Taiwan will follow up with
further privatization efforts, including the sale of 40%
ownership in Changhwa Commercial Bank. That bank deal is
currently valued at US$2 billion and should be completed by
the end of 2005 (septel).

Higher Share Price
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5. CTC share prices reached a four-year high of NT$64.1 on
March 10, a possible factor behind the Premier's decision to
sell at this time. In addition, investors may be attracted
by CTC's 2004 dividend yield of 7%, higher than prevailing
interest rates 2% on bank deposits (This doesn't quite ring
true to me. A foreign investor will evaluate against all
other investment options -not just Taiwan domestic interest
rates on bank deposits. ) . CTC recorded NT$50 billion in
profits in 2004. CTC's share price puts it at a price-
earnings ratio of 12. China Airlines, another profitable
state-owned enterprise, has a P/E ratio of 11. CTCLet's
compare apples to apples, you cite the dividend yield above,
what is China Airlines dividen yield and how about the
return on asset figure for both CTC and CAL? has 13
million fixed-line subscribers and more than eight million
mobile customers among Taiwan's population of 23 million.
CTC occupied 84% of Taiwan's telecom market in terms of 2004
sales.

Public Debt Buildup
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6. The estimated revenue of NT$105 billion from selling 17%
of CTC equity shares would cut the need to issue public
bonds in 2005 by nearly 60% to NT$150 billion. Projections
for outstanding public debt as of December 2005 would be
reduced by 2.8% and outstanding debt as a share of GNP would
decline one percentage point from 35.7% to 34.7%. According
to Lin Shuen-yu, a senior specialist of the Budget Bureau,
Taiwan's fiscal deficit in 2005 would reach NT$336 billion
without the planned sale of CTC equity. If the sale does
not materialize, Taiwan would finance the fiscal deficit by
issuing NT$255 billion in public bonds and using NT$81
billion of the government's past cash savings.

Business Opportunities
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7. The plan to sell CTC shares will provide investment
bankers and underwriters a good commercial opportunity. The
estimated underwriting fee of US$60 bmillion (How does
Taiwan make money out of this deal if the fees to collect
NT$105 billion are US$ 60 billion, well above the income to
be generated?) will attract Goldman Sachs, Merrill Lynch and
UBS Securities, which arranged the CTC equity sales of
US$1.37 billion in 2003. Other contenders for underwriting
include Morgan Stanley, Credit Swiss First Boston,
Citigroup, Daiwa Securities, Nomura Securities, and Deutsche
Bank.

Labor Opposition to Sale
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8. CTC labor unions have opposed privatization and may try
to block the planned sale. The LY has passed resolutions
requiring that CTC resolve issues with the unions before any
sale. Lee Ching-sung, Chief of the Privatization Task Force
under the Council for Economic Planning and Development,
told AIT/T that the planned sales could fail again if MOTC
fails to persuade CTC employees to give up the monthly
pension privilege that they are still entitled to even after
CTC was split from the Directorate General of
Telecommunications in the late 1990s. Ms. Peng Su-ling, a
senior economist of the Chunghua Institution for Economic
Research, told AIT/T that CTC house labor unions oppose
privatization because CTC employees would lose their status
as civil service employee, see a decline in wages, and face
higher performance standards. However, Ms. Peng believed
that privatization was in the interest of the entire economy
due to increased competition and higher efficiency. We
expect the government will proceed with sale of CTC equity
in spite of labor opposition. I thought the budget bill in
January cancelled the privatization plans. What has changed
to make this privatization possible now? Can we assess
whether this will really go through or not? Will labor
opposition/political intrigue combine to kill the move?
PAAL