US embassy cable - 05TAIPEI1409

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 
TREASURY FOR OASIA/MOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
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 
------- 
 
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 
------------- 
 
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 
-------------------------- 
 
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 
------------------ 
 
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 
------------------- 
 
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 
---------------------- 
 
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 
------------------------ 
 
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