US embassy cable - 05TAIPEI2085

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002085 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC AND EB/CIP/BA, STATE PASS AIT/W AND 
USTR, USTR FOR KI AND FREEMAN, USDOC FOR 
4430/ITA/MAC/AP/OPD/MBMORGAN 
 
E.O. 12958: DECL: 05/06/2015 
TAGS: EINV, ECON, TW 
SUBJECT: CHUNGHWA TELECOM PRIVATIZATION WITHIN SIGHT 
 
REF: TAIPEI 1975 
 
Classified By: AIT Director Douglas Paal, Reason 1.4 (b/d) 
 
1.  (U) Summary: Chunghwa Telecom (CHT) announced April 25 
that it will accept applications until May 17, 2005 from 
firms interested in facilitating placement of 
government-owned shares in the New York Stock Exchange.  The 
Ministry of Transportation and Communications (MOTC), CHT,s 
biggest shareholder, is reportedly planning to release 15 
percent of its shares in American Depositary Receipts (ADRs) 
and will sell another two percent of its shares domestically 
by the end of June.  The Ministry's proposed sales would 
lower its stake in CHT from 65 percent to below 50 percent, 
meeting the Taiwan government definition of privatization. 
Analysts estimate up to 82 billion NT dollars (USD 2.6 
billion) may be raised from the sale.  As much as 1.8 billion 
NT dollars (USD 57 million) may be awarded to investment 
banks securing the bids.  Despite broad government support 
for MOTC's plan to complete CHT privatization, CHT,s 
inability to resolve disputes over pension plans with its 
labor union could be an obstacle.  End Summary. 
 
============================================= == 
Taiwan Announces Plans for Privatization of CHT 
============================================= == 
 
2.  (U) After Premier Frank Hsieh promised in a Financial 
Times interview in March 2005 to privatize CHT by end of 
June, industry observers have been eagerly anticipating 
MOTC,s new privatization plan.  The government of Taiwan 
through the MOTC is currently the largest shareholder and 
controls 64.89 percent of CHT.  The ministry will need to 
release at least 15 percent of its equity to lower its 
holdings to below 50 percent, the Taiwan government's 
benchmark for privatization.  In his testimony to the 
legislature April 8, 2005, CHT Chairman Tan Ho Chen announced 
that MOTC plans to sell 15 percent of its shares as American 
Depositary Receipts (ADR) and two percent in the domestic 
market to fulfill the Premier's pledge.  Ho Chen added that 
CHT,s long term plans include additional sales of CHT stock 
on the Taiwan Exchange, but stressed that MOTC plans to 
retain control with a 34 percent stake.  (BIO NOTE: Contrary 
to standard Chinese naming conventions, the CHT Chairman is 
referred to in official documents as Chairman Ho Chen. End 
Note) 
 
3.  (U) Since 2000 MOTC has sold 35.11 percent of its 
holdings of Chunghwa Telecom in six sales.  In the latest 
significant trade in July 2003, MOTC released 13.576 percent 
of its total stock and collected 64.2 billion NT dollars (USD 
2 billion) from shares auctioned domestically and ADRs. 
Prior to that, MOTC sold 13.475 percent in December 2002 and 
raised 65.4 billion NT dollars (USD 2.1 billion) from 
domestic sale. 
 
======================= 
Now is the Time to Sell 
======================= 
 
4.  (U) Local analysts currently consider CHT a good 
investment.  In fiscal year 2004, CHT was Taiwan,s second 
most profitable company.  In that year, CHT reported total 
revenues of 185 billion NT dollars (USD 5.88 billion), net 
income of 50.9 billion NT dollars (USD 1.62 billion) and 
earnings per common share (EPS) of NTD 5.28 (USD 1.66 per 
ADS).  CHT offered a cash dividend of NTD 4.9 per share in 
2004.  CHT Chairman Ho Chen told the legislature April 8, 
2005 that "it would be the right time for the share sale for 
CHT in terms of its market performance."  In the Taiwan Stock 
Exchange (TSE), CHT,s share price has been trending upward 
since last June.  Based on CHT,s closing price of NTD 60.7 
per share on the TSE May 4, 2005, MOTC,s planned ADR 
issuance, likely in the range of 1.16 billion to 1.35 billion 
shares, could be worth as much as 82 billion NT dollars (USD 
2.6 billion).  This cash income could be used reduce the 
government's fiscal deficit, projected to reach 277 billion 
NT dollars (USD 8.8 billion) for year 2005, by 30 percent. 
 
5.  (U) Investment houses are closely eyeing CHT,s upcoming 
ADR sale.  In the 2003 American offerings, CHT reportedly 
awarded 1.15 billion NT dollars (USD 36.5 million) to Goldman 
Sachs, Merrill Lynch and UBS for the underwriting rights. 
Encouraged by this lucrative trade, a dozen international 
securities companies, including JP Morgan Chase, Morgan 
Stanley and Nomura Securities, have expressed strong interest 
in the June offering, which is said to be valued at 1.8 
billion NT dollars (USD 57 million).  The media speculates, 
based on previous ADR placements, that three investment 
banks, probably with experience in handling privatization, 
sales of telecom stocks or underwriting at the New York Stock 
Exchange, will be selected by end of May. 
 
================================= 
How to Solve the Pension Problem? 
================================= 
 
6.  (C) Privatization of CHT is one of Taiwan,s WTO 
accession commitments.  The Taiwan government has repeatedly 
promised privatization of CHT despite the fact that it has 
not yet reached an agreement with the CHT labor union over 
pension plans.  Vice Chairman of the Council for Economic 
Planning and Development (CEPD) Hsieh Fada told AIT that 
CHT's announcement of the ADR underwriting bid came as a 
surprise given that negotiations with the union didn't appear 
to be near to a solution.  CHT had proposed that employees 
nearing retirement be given a lump sum payment upon 
completion of service and that future retirees pensions be 
calculated and paid in accordance with Taiwan's new pension 
law.  CHT's union demands that all employees, regardless of 
length of service with the company, be given the option of 
retaining the current retirement system with monthly pension 
payments after CHT is privatized.  If CHT were to accept such 
a proposal, which would be unique in Taiwan,s labor market, 
MOTC would need to bear 45 billion NT dollars (USD 1.4 
billion) in pension liabilities for CHT.  In order to gain 
the union's support, the EY is considering draft legislation 
to amend the current privatization law so that both sides 
could reach an agreement that would carry a smaller price tag 
for the government roughly 7.1 billion NT dollars (USD 225 
million). 
 
========================== 
CHT Losing Traffic to VoIP 
========================== 
 
7.  (C) CHT privatization faces challenges apart from labor 
relations, but the government seems determined to press 
forward.  In an April 20 meeting with AIT Director, Minister 
w/o Portfolio Lin Ferng-ching confided that the privatization 
of "Chunghwa Telecom is like a noose around my neck."   Tsai 
Zse-hong, Deputy Executive Secretary of the Executive Yuan's 
Science & Technology Advisory Group (STAG) said that 
privatization was a difficult issue and that CHT has seen a 
large loss of traffic recently due to a migration to Voice 
over Internet Protocol (VoIP) services.  He declined to 
quantify how much traffic has been lost, but indicated that 
STAG isn't sure if the numbers being given to it truly 
reflect traffic loss by CHT.  Tsai said CHT is very concerned 
about VoIP and one rumor floating about is that CHT is trying 
to program features into its system that would degrade the 
quality of popular VoIP operator Skype. 
 
=========================================== 
COMMENT: Strike Before the Market Cools Off 
=========================================== 
 
8.  (C) Conventional wisdom says that technological changes 
and competition from internet and wireless services are going 
to significantly erode CHT's market share over the next five 
to ten years.  Although CHT is still far and away the most 
powerful player in Taiwan telecoms, it appears the government 
has decided that telecom share prices have reached a level 
that justifies releasing these shares.  Given CHT's declining 
voice traffic and concerns that its business is migrating to 
VoIP providers, expect MOTC to go to great lengths to 
overcome problems in order to place these shares while the 
market for them is relatively strong.  End Comment. 
PAAL