Fitch Ratings has affirmed Taiwan-based Chunghwa Telecom's debt ratings with a stable outlook. The agency has simultaneously withdrawn all the ratings as they are no longer considered by Fitch to be relevant to the agency's coverage.

­The ratings reflect Chunghwa Telecom's continued leadership in Taiwan's telecom market with solid cash flow generation and strong financial flexibility. Although Chunghwa Telecom's operating EBITDAR margin and post-dividend free cash flow (FCF) are likely to deteriorate in 2012, Fitch expects the company's medium-term credit profile to remain compatible with the current rating level.

Chunghwa Telecom remains the largest integrated telecom operator in Taiwan, with revenues accounting for around half of Taiwan's telecoms service market. The company enjoys leading positions in local and international telephony, mobile, broadband access and internet services. In subscriber market share terms, Chunghwa Telecom controlled 95.1%, 34.8% and 79.7% of local fixed-line, mobile and broadband access services, respectively, at end-June 2012.

Chunghwa Telecom recorded steady revenue growth in 2011 and H112, driven by higher mobile data revenue and smartphone sales. However, its operating EBITDAR margin has deteriorated due to tariff cuts, higher cost of handsets sold, including those from its subsidiary Senao, as well as growth in the lower-margin corporate solution and information and communication technology business. Fitch expects Chunghwa Telecom's operating EBITDAR margin to fall below 40% and post-dividend FCF to turn negative in 2012.

Fitch believes that the sub-40% operating EBITDAR margins and a single year of negative FCF will not lead to a change in Chunghwa Telecom's credit profile over the medium term due to its strong net cash position and solid cash flow from operations. Chunghwa Telecom had net cash in excess of TWD65.5bn at end-2011. In addition, the company has the lowest funds flow from operations (FFO)-adjusted leverage among major peers in Asia-Pacific. Fitch believes that Chunghwa Telecom's leading market position will help underpin its large net cash position. The agency expects Chunghwa Telecom's FFO-adjusted gross leverage to be 0.2x (2011:0.04x) and FFO-adjusted net leverage to be -0.5x in 2012.

Fitch expects Chunghwa Telecom's post-dividend FCF to turn positive in 2013 and thereafter; Chunghwa Telecom's stated policy is to primarily rely on cash flow from operations and, to a lesser extent, loans from commercial banks to fund capital expenditure, make dividend payments, repay debts and fulfil other commitments.