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Investment Overview for China Telecom (NYSE:CHA)
Mobile Voice Service and Mobile Phones
- Mobile Service & Phones EBITDA Margin:We estimate that this figure will slightly decrease from 12% in 2013 in the short term due to large amounts of subsidies offered by the company on mobile phone sales owing to increasing competition. However, we estimate the figure to increase to about 18% by the end of our forecast period as the company establishes itself as a formidable player in the 3G and 4G space. There could be an upside of about 26% to our price estimate if EBITDA margins increase to 20%. There could also be a downside of a similar nature if EBITDA margins reach only 16%. This primarily depends on the amount of subsidies offered by the company and incremental revenues that it is able to generate through increasing its 4G coverage and mobile value added business.
- Average Monthly Mobile Revenue Per User:We estimate that this figure will increase from about $8.3 in 2013 to $11 by the end of our forecast period due to increasing popularity of smartphones in China and growing data usage with 3G and 4G technologies. If the ARPU changes by $3 on either side of our estimate, there could be an upside/downside of about 10% to our price estimate.
- Average Monthly Broadband Revenue Per User: We estimate that this figure will decrease marginally from $9.67 in 2013 to $9.33 by the end of our forecast period mainly because of competition and increasing penetration in low-income areas. However, there could be an upside of about 16% to our price estimate if this figure increases to $11. There could be a downside of similar nature if the figure falls to $7.50. This largely depends on the growth that fixed-line broadband internet will see considering availability of more convenient mobile and wireless internet.
China Telecom is a telecom service provider based out of China. It offers both mobile and landline services. It makes its money primarily through wireless telecom and landline services such as broadband Internet and voice services. The company is currently concentrating on expanding its 3G and 4G services across the country.
Mobile business and broadband internet are expected to be the growth drivers for the company.
The Mobile Services and Phones division constitutes majority of China Telecom's value mainly because of the following reasons:
Large customer base
China Telecom had a customer base of around 181 million in its mobile division while its broadband internet subscribers were over 103 million by the end of May 2014.
High Average Revenue Per User
The monthly average revenue per mobile user was $8.3 in 2013 which is lower than the $9.7 that an average broadband user pays. However, mobile ARPUs are on the rise bolstered by data usage as opposed to broadband ARPUs. By the end of the forecast period, mobile ARPUs will have risen to $11 while broadband ARPUs will have declined to $9.33 as per our estimates.
Increasing smartphone sales
China has overtaken the U.S. as the the largest smartphone market in the world by volume. Increasing smartphone adoption will help drive data revenues up since the average revenue per user generated from someone using a smartphone is far higher than any other phone.
Being a part of this huge market will help China Telecom leverage its subscriber base of more than 181 million to reap the benefits of a growing smartphone user base.
Increasing 3G adoption
3G adoption in China has steadily increased with over 38% of mobile phone users using 3G services. China Telecom has led the Chinese carriers in 3G penetration with over 58% of its wireless subscribers on the faster network. Considering that the company has almost 80 million subscribers on the slower 2G network waiting for a low-budget smartphone to jump on to the faster 3G network, it gives the company immense scope for growth in the future. Growing standards of living and an increasing supply of low-cost smartphones should drive the adoption rate up, and consequently, its data revenues.
Government-mandated restructuring in the Chinese Telecommunications Industry
Telecommunications industry in China is largely regulated by the Government. Restructuring initiatives were taken in 2008-09, leading to merging and de-merging of landline and mobile businesses across companies. As a result of the shuffle, only 3 companies remained in the telecom sector and China Telecom acquired China Satcom and China Unicom's CDMA business in the process. While last restructuring was beneficial for China Telecom, we cannot be sure it will be so the next time government decides on a reshuffle. In fact, policymakers in China are planning on converging television broadcast, telecom service and internet access networks next. Frequent restructuring will meddle with the company's long-term plans and creates uncertainty. While there is no development on that front yet, the government initiated a new tax regime for the telecom industry in 2014 which is likely to negatively impact the carrier's income in the near term.
Tariff Regulations by the Chinese government
Being state-controlled, China Telecom experiences frequent government intervention in its business in the form of tariff ceilings. Since prices are not decided by the market forces but by the government, we cannot identify a trend in market prices to forecast the risk. Government-mandated tariff adjustments may come without warning and affect profitability if the tariffs are lowered. Frequent regulations also serve to limit the company's flexibility to respond to changes in the environment and market conditions.
Diversification away from China
Telecom companies around the world such as Deutsche Telekom, Telefonica, Vodafone and Bharti Airtel have diversified their businesses to mitigate the risks of operating in only one environment. China Telecom's businesses are currently concentrated in China only, leaving it open to risks associated with China's future growth and government regulations. With its current plans to diversify into Europe and the U.S. by forging MVNO partnerships with domestic carriers, the company is looking to mitigate that risk to some extent.
Substitution of Landlines with Mobile Phones
Due to ease-of-use and convenience, increasing number of people are substituting their landlines with mobile phones. Newer technologies like VoIP have ensured that a fixed line is no longer needed for voice services. All the major incumbent telecom carriers, including China Telecom and China Unicom have been losing lines, as customers move on to VoIP or wireless services.
High level of subsidies on mobile handsets
The company has been trying to attract customers with large scale subsidies on the mobile phones it sells. The company launched over 300 varieties of 3G models at extremely low prices in 2010 and over 400 in 2011. Although this helped the company attract new users at a rapid pace, it led to a huge dip in the profit margins of the company.
High Customer Growth Potential
There is high customer growth potential in Chinese telecommunications industry in all regions. Rural market largely remains untapped and has been recognised as a big potential for expanding customer base and increasing revenues. The Government’s initiatives for reform and development in rural areas should further enhance the company's prospects.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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