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Chunghwa's Worldly Ambitions

One of the great philosophical questions is this: Would you rather have a big piece of a small pie or a small piece of a bigger pie? Chunghwa Telecom (NYSE: CHT  ) is definitely the "big piece, small pie" variety, because the Motley Fool Income Investor pick dominates communications services on the small island of Taiwan -- small, at least, compared with its mainland neighbor.

In its fourth-quarter and full-year 2007 earnings announcement this week, the company said it holds a commanding lead in its markets -- a 36% share of the wireless market, a 68% share of the Internet service market, and an 87% share of the broadband access market. But growth is another story -- Chunghwa had to work hard to manage 7.8% top-line growth for the year. And that dominant position is proving harder to hold.

Because only about 23 million people live in Taiwan, telecom services are all about efficiency and up-selling services. This is quite different from mainland China, where operators like China Mobile (NYSE: CHL  ) and China Unicom (NYSE: CHU  ) sign up millions of new mobile customers each month. Rather than courting new subscribers, Chunghwa aims to poach from competitors and persuade current users to upgrade services with more features and higher bandwidth. While the company is making progress in moving customers up to next-generation services, operations are still strained, as operating cash flow dropped 13% in 2007.

Seeking new growth, the company teamed up with Nortel (NYSE: NT  ) last year to make a run at a WiMAX network in Taiwan, but Chunghwa failed to secure a license. Considering the headwinds that U.S. WiMAX leaders Sprint Nextel (NYSE: S  ) and Clearwire (Nasdaq: CLWR  ) are facing, that may not be such a bad thing right now, but Chunghwa needs differentiated services to compete. Also, Chunghwa is looking at bigger pies abroad -- namely greater China and Southeast Asia -- for possible investment.

With more than $2.5 billion on the balance sheet and no debt, Chunghwa certainly can afford to go shopping a little. It's hoped it can find a nice growth play to help prop up its domestic operations.

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