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Investment Overview for China Telecom (NYSE:CHA)
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Mobile Voice Service and Mobile Phones
- Mobile Service & Phones EBITDA Margin:We estimate that this figure will decrease from 23% in 2011 to about 18% by the end of our forecast period due to large amounts of subsidies offered by the company on mobile phone sales. However, there could be an upside of about 18% to our price estimate if EBITDA margins fall only till 20%. There could also be a downside of a similar nature if EBITDA margins fall further to reach 16%. This primarily depends on the amount of subsidies offered by the company and incremental revenues that it is able to generate through increasing mobile value added business.
- Average Monthly Mobile Revenue Per User:We estimate that this figure will increase from about $8 in 2011 to $13 by the end of our forecast period due to increasing popularity of smartphones in China and greater number of applications being developed by the company. The upside/downside associated with an increase/decrease in ARPU levels is however low due to the low EBITDA margins on offer. For example, an increase/decrease of $6 on either side of our forecast would cause an upside/downside of only 1%
Broadband internet
- Average Monthly Broadband Revenue Per User: We estimate that this figure will decrease marginally from $10.40 in 2011 to $9.75 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 8% to our price estimate if this figure increases to $11. There could be a downside of similar nature if the figure falls to $8.50. This largely depends on the growth that landline broadband internet will see considering availability of more convenient mobile and wireless internet.
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China Telecom is a telecom service provider based out of China. It offers both mobile and landline services. It makes its money primarily through landline services such as broadband Internet and voice services. The company is also concentrating on expanding its mobile business with particular emphasis on value added services. It has also started offering mobile phones at highly subsidized rates in order to promote 3G and increase data usage.
Mobile business and broadband internet are expected to be the growth drivers for the company.
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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 110 million in its mobile division at the end of 2011 while only about 76 million subscribed to its broadband internet.
High Average Revenue Per User
The monthly average revenue per mobile user was $8.17 in 2011 which is lower than the $10.40 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 $13.40 while broadband ARPUs will have declined to $9.75 as per our estimates.
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Increasing smartphone sales
China is poised to decisively overtake U.S. as the the largest smartphone market in the world by volume by the end of 2012, having crossed U.S. for the first time in the third quarter of 2011. 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 100 million to reap the benefits of a growing smartphone user base.
Increasing 3G adoption
3G adoption in China has so far been slow with less than 13% penetration among mobile subscribers presently. However, China Telecom has been slowly but steadily adding close to 2 million 3G subscribers each month. Considering that the company has almost 90 mn subscribers on the slower 2G network waiting for a low-budget smartphone to jump on to the faster 3G network, it gives the company a big area of 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. A potential addition of the iPhone to China Telecom's armoury should also see an increase in 3G adoption.
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.
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 and wireless 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. This has 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 further enhance company 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.
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