China Telecom (NYSE:CHA) has kick-started its overseas expansion plans with the launch of a U.K. mobile virtual network operator (MVNO) on May 22. The carrier will offer wireless services under its own brand but will run on the network of Everything Everywhere, a joint venture between France Telecom and Deutsche Telekom.  Continuing on this relationship, we expect China Telecom to use these carriers’ networks to expand into their respective countries of France and Germany as well. State-owned China Telecom is China’s largest land-line operator and the third-largest wireless provider after China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU).
We believe that China Telecom’s expansion plans bode well for the carrier since it diversifies the risk of operating in a single country as well as caters to the needs of a considerable number of Chinese nationals settled abroad. However, this in itself should not significantly impact the fundamentals of the stock since the growth abroad is still limited compared to the prospects in its home country, where demand for 3G services is on the rise.
Our price estimate for China Telecom is $68, which is about 12% ahead of the current market price.
MVNO in the U.S. as well
In addition to Europe, China Telecom has interests to expand in the U.S. as well. We discussed earlier how China Telecom could look to roll out a stateside MVNO service by entering into an agreement with either Sprint or Verizon, as both of them operate networks that run on the same CDMA technology as China Telecom’s. (see China Telecom to Enter U.S. Wireless Market in 2012)
If the telecom provider’s European plans take off, it might look to build out infrastructure for its own network instead of leasing out some third-party’s. However, such a ploy may face opposition from the U.S. and European governments, who are wary of a growing global Chinese presence. (see China Telecom’s Planned US Entry Fraught with Risks)
Diversification Good for Business
We see this move by China Telecom as a way of diversifying its business outside China. Telecom companies around the world such as Deutsche Telekom, Telefonica, Vodafone and Bharti Airtel have diversified their businesses globally to mitigate risks of operating in a single environment. However, China Telecom’s business has so far remained concentrated in China, leaving it open to risks associated with China’s future growth and government regulations. With its current plans to diversify into Europe and later into the U.S., the company is looking to somewhat mitigate that risk.
The market for consumers who need mobile phones that operate both in China and Europe/U.S. is limited but substantial. There are 2 million Chinese living in western Europe currently.  According to the U.S. Census Bureau, there were 3.8 million Asians of Chinese descent living in the U.S. in 2009.  It is therefore a good opportunity for the company to gain a toehold into a new market by addressing the needs of a niche, before it unleashes bigger and more ambitious overseas plans.Notes: