Contrary to most international equity markets, where high growth tech and telecom stocks often pay no dividend at all and low growth utility stocks tempt investors with a high dividend, Chunghwa Telecom is planning to offer investors an 8% dividend yield.
At this level market observers say that the yield will equate to 85% of net income, with the company further guaranteeing a dividend yield equating to a minimum of 50% of net profits in future years. For Chunghwa, this presents little in the way of a problem, since it has traditionally paid a high cash dividend to the government. Indeed, over the past three years the company has been able to maintain an average annual cash flow of NT$85 billion ($2.61 billion).
As one commentator puts it, "The rationale for a high dividend is to make investors feel that Chunghwa is a safe place to park their money until the market decides whether the TMT sector (technology/media/telecommunications) is going to go up, down, or sideways this year. Investors want to have a hedge with a low beta in their portfolios and in Taiwan, this is going to be that stock."
The decision lies at the heart of the strategy devised by global co-ordinator Goldman Sachs and joint bookrunners Merrill Lynch and UBS Warburg. Feedback from pre-marketing of the ADR offering which began this week, also suggests that it has been a correct one.
"The general perception seems to be that investors are negative on telecoms generally and fairly neutral towards Taiwan at the moment," one banker notes. "It's a difficult environment in which to do a deal like this and so it is more sensible to make the deal a defensive play on Taiwan for those investors that want exposure."
Normally, the announcement of a higher than expected dividend could be expected to push the domestic counter higher as retail investors migrate towards it. In Taiwan, however, the heavy tech weighting of the TWSE means that there is little understanding of the concept, since few stocks pay much of a yield.
"It's a shame as Chunghwa's free float is almost entirely in retail hands," one market player comments. "But you never know, the news may filter through and have a positive impact before roadshows get underway."
Attractive valuation
For international accounts, the domestic stock price will provide a valuable, yet incomplete benchmark. Key will be international comparisons, with investors suggesting that the company will come at a discount to its peers. Some belief that the company may be priced on an EV/EBITDA ratio of as low as five to six times 2001 earnings.
By contrast, benchmark Asian telecom stocks are averaging an eight to nine times range in line with global standards, which include, for example Telecom Italia on 7.92 times and Holland's KPN on 7.21 times. Both levels mark a far cry from the averages reported in the middle of last year before the autumn's huge wash of telecoms-related paper and the true costs of 3G licenses became clear. At that point, European telecom stocks were typically commanding a 19.2 times average and emerging market plays a 13 times average.
In Asia, bankers report that counters such as Singapore Telecommunications and Australia's Telstra sit in the middle of the pack on respective ratios of 11.9 times and 9.3 times 2001 earnings. They also say, however, that the region's averages are skewed by the poor performance of Korea Telecom at one end of the range (although it remains above its market average) and the Mainland China stocks at the other. The former is currently trading at 4.5 times 2001 earnings, and the latter 13 to 14 times.
On the basis of its domestic share price which closed yesterday (Wednesday) at NT$81.5, Chunghwa will raise NT$108.47 billion ($3.33 billion). In total, the company will offer 1.158 billion shares (115.8 million ADRs), with a further 174 million shares available via the greenshoe.
In terms of the company's 9.647 billion share equity base, this represents 13.8% including the greenshoe. Originally, the company had planned to offer 12% to international investors, but Taiwan's parliament allowed the amount to be increased slightly last October in response to the dismal subscription rates to its domestic IPO.
Should market conditions remain stable, roadshows are scheduled to commence the week beginning February 4, wrapping up on February 22. In addition to the three leads, there are also three co-leads comprising ABN Amro, Credit Suisse First Boston and Deutsche Bank and four co-managers comprising CLSA, Daiwa, ING Barings and Soc Gen.
Will international investors behave differently to domestic?
Domestically, the company's privatization has endured a rough ride both in terms of the way that it has been handled and the public's response to it. Yet, despite the negative overhang this has created, lead mangers remain convinced that this does not mean it will be subjected to a similar fate in the international markets.
Acknowledging that the negative PR image needs to be overcome effectively and quickly, bankers argue that once the deal gets into its stride, investors will be enticed by valuation, fundamentals and growth.
"Before a big deal like this comes out, there is always some trepidation, particularly now with so many other competing telecom deals," says one. "But once the momentum gets going, things start to relax a bit more."
In particular, Chunghwa will aim to show that it has been able to withstand competition to its former monopoly position. While, for example, Taiwan Cellular Corp (TCC) has been able to overtake it in numbers of subscribers in the space of only three years, it is still less profitable.
To the end of September, TCC had 4.78 million users, compared to Chunghwa's 4.19 million. Yet, where revenue is concerned the figures are reversed, with Chunghwa recording NT$19.6 billion ($602 million) over the first nine months to TCC's NT$19.3 billion ($592 million).
As one observer concludes, "The real story behind the numbers is that Chunghwa attracts high-end business users, while TCC has gone for lower value, pre-paid users buying sim cards from their corner shop."
