China, the world’s largest mobile phone market, saw a total of about 12 million new subscriber additions in June. This took the total mobile subscriptions in China to 1.05 billion, well past the 1 billion mark it had crossed in March. To put this number in perspective, the U.S. currently has just over 330 million active connections in all. While the Chinese figure may not be reflective of the actual number of mobile users in country as some of these connections are currently inactive, it is still a compelling statistic that shows the huge growth opportunity that China presents for many smartphone manufacturers. At the same time, it is also a huge opportunity for the incumbent Chinese telecom providers such as China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom to tap their huge 2G subscriber base and drive the demand for the more lucrative 3G data services.
Of the three Chinese carriers, China Telecom may be the smallest but its subscriber base of over 144 million easily puts most wireless carriers in the developed world to shame. The largest wireless carrier in the U.S., Verizon, has about 110 million total connections currently and it operates in an increasingly saturated market. On the other hand, China’s 3G penetration is only about 17% and is likely to increase heavily in the coming years as smartphone makers target China. As a result, China’s smartphone market is growing by leaps and bounds and is poised to become the largest by the end of the year.
Armed with the iPhone, the Lumia as well as a horde of cheaper Android handsets, China Telecom looks set to ride the widespread 3G transition in the coming years. We have a $65 price estimate for China Telecom stock, which is about 40% ahead of the current market price.
3G Market in China is an Equitable Mix
With more than 680 million subscribers, China Mobile is the largest wireless carrier in the world and has almost five times as many subscribers as China Telecom. But when it comes to 3G, the difference is not nearly as much. As of June 2012, China Mobile had around 67 million 3G subscribers, only about 30% ahead of the 51 million that subscribe to China Telecom’s 3G network. China Telecom announced this week that it had added 2.8 million 3G subscribers in June, which is about a third of the overall 3G adds for the month in China. Low 3G penetration of about 17% in China is giving smaller wireless carriers such as China Telecom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.
China Telecom has also been helped by the fact that China Mobile currently runs its 3G network on a homegrown proprietary TD-SCDMA standard that is not compatible with many smartphones. That may soon end, however, as Qualcomm recently launched a wireless chipset (next generation MDM9615) that supports the standard, making it likely that many popular smartphones, including the iPhone, could be making their way to the world’s largest carrier soon. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal) Such a deal has however not been officially announced yet and China Telecom will be looking to make the most of its iPhone opportunity before that happens.
3G To Bolster Data Revenues
While the arrival of the iPhone on China Mobile could potentially be a huge blow to China Telecom, it is a good sign that the carrier is not banking on the popular smartphone alone to drive 3G adoption.
The carrier recently came up with a strategy to sell low-cost 3G smartphones made by ZTE, Huawei and Lenovo that run on its 3G network. Considering that the Chinese market is still in an evolving stage, the demand for cheaper Android smartphones is huge. Even Nokia, which is trying to push its Lumia line of smartphones and create a third ecosystem with Microsoft, is launching Lumia handsets at lower price ranges. The Lumia 800C was launched on China Telecom at about $200 cheaper than the iPhone.
China’s huge potential is fostering healthy competition among handset makers and this will help China Telecom manage its subsidies better so as to lessen the impact on its margins going forward. (see Chinese Telcos Get Fat Margins Selling Cheaper Smartphones)
Driving 3G adoption will serve to drive the ARPU levels of China Telecom further, as has been the case in the developed world. Carriers such as Verizon, AT&T and Sprint in the U.S. have seen rapid growth in mobile data revenues over the past few years, driven by growing demand for 3G/4G-capable smartphones. This has come even as their voice ARPUs declined, a trend that can be seen in the Chinese telecom market as well. China Mobile’s voice ARPU levels have declined from above $7.30 levels in 2007 to about $6.60 in 2011, by our estimates. (see China Mobile Sits Atop A Gold Mine As China Tops One Billion Mobile Subscribers) We expect to see China Telecom’s mobile ARPUs continue to increase in the coming years as 3G demand bolsters data ARPUs further.