Collaboration With NTT And Investments In AI And Satellite Services Will Unlock Global Telecom Opportunities

Key Takeaways

• Strategic investments in AI, data centers, and undersea cables are set to create new revenue streams and improve operational efficiency and margins.
  
• Strong 5G and broadband growth strategies, alongside ICT investments, are projected to drive substantial revenue and earnings improvements with enhanced margins.
  
• Decline in core business revenue, rising costs, and increased CapEx pose risks to Chunghwa Telecom's profitability amidst uncertain ICT segment growth.

Catalysts

Provides telecommunication services in Taiwan and internationally.

• Collaboration with NTT and leadership in Open RAN testing positions Chunghwa Telecom for new global opportunities in telecom innovation, likely impacting future revenue growth and strengthening earnings.
  
• Expansion in satellite services utilizing OneWeb and SES resources is expected to drive satellite-related revenue growth, contributing positively to overall revenue and potentially enhancing net margins.
  
• Strong 5G and fixed broadband subscriber growth, along with successful 5G migration strategies, is poised to increase ARPU and core mobile service revenue, potentially improving earnings and net margins.
  
• Increased investment in ICT business, particularly in IDC, cloud, and cybersecurity services, is anticipated to fuel substantial revenue growth, with recurring revenue stabilizing and potentially enhancing net margins.
  
• Strategic CapEx allocation towards high-growth areas such as AI, data centers, and undersea cables is set to drive new revenue streams while optimizing operational costs and improving net margins.

Chunghwa Telecom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chunghwa Telecom's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 16.8% in 3 years time.
• Analysts expect earnings to reach NT$40.2 billion (and earnings per share of NT$5.31) by about January 2028, up from NT$37.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 26.0x today. This future PE is lower than the current PE for the US Telecom industry at 33.1x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.93%, as per the Simply Wall St company report.

Chunghwa Telecom Future Earnings Per Share Growth

Risks

• Decline in international voice revenue, despite growth in other sectors, could impact overall revenue and profitability.
  
• The ongoing decline in mobile voice and fixed voice revenue could adversely affect Chunghwa Telecom's core business income before tax.
  
• Rising operating costs, including employee benefits and infrastructure investment, may reduce net margins in 2025.
  
• Increased CapEx, particularly in nonmobile areas like AI and data centers, could pressure earnings if anticipated returns do not materialize as expected.
  
• Reliance on ICT segment growth for revenue could be risky if market demand for digital transformation slows, impacting overall revenue growth.

Valuation

• The analysts have a consensus price target of NT$121.67 for Chunghwa Telecom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$130.0, and the most bearish reporting a price target of just NT$108.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$238.7 billion, earnings will come to NT$40.2 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of NT$124.5, the analyst's price target of NT$121.67 is 2.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.