China Telecom’s Earnings: 3G, CDMA Network Acquisition & Broadband To Provide Strong Growth

Among the three Chinese telcos, China Telecom (NYSE:CHA) has been the front-runner in terms of 3G penetration. It has rapidly added 3G subscribers in the last couple of quarters, which have been instrumental in the carrier’s mobile ARPU rebound. In an important development last year, China Telecom acquired CDMA network assets from its parent company to avoid paying network leasing fees which were denting the company’s profitability (as measured by EBITDA margins). Hence, this acquisition is expected to improve China Telecom’s profitability, even as smartphones subsidies put more pressure.

China Telecom, the largest broadband service provider in China, is beefing up its stronghold with large investments in its Fiber-To-The-Home (FTTH) high speed broadband project. With the broadband subscriber base larger than the carrier’s 3G subscriber base, high speed broadband holds immense potential for China Telecom as the low broadband penetration offers substantial growth opportunities.

Therefore, a robust increase in the carrier’s 3G data revenues, CDMA network acquisition and broadband growth are likely to push China Telecom’s earnings higher when it releases its half-year interim results on August 21.

See our full analysis for China Telecom’s stock here

Growing 3G Subscriber Base Propels Data Revenue Growth

China Telecom’s 3G subscribers have grown impressively in the last few quarters. As a result, the carrier has increased its wireless market share to around 15% at present from around 4% in 2008. China Telecom has a 3G penetration of 50%, as compared to 18% and 38% for rivals China Mobile and China Unicom respectively. For the six months ending June 2013, China Telecom added more than 18 million 3G subscribers, thereby seeing 25% growth compared to the same period last year. However, considering China Telecom’s comparatively higher 3G penetration, we feel that the monthly 3G subscriber adds might stagnate at the current rate of around 3 million per month. ^[1]

With a robust increase in data consumption by China Telecom’s 3G subscribers, data revenues have become the most important driver for the carrier’s revenue growth. Data revenues now contribute almost 50% to the carrier’s mobile service revenues. The growing importance of data revenues is highlighted by the fact that in 2012, mobile service revenues grew by 36%, bolstered by a 50% increase in the carrier’s data revenues. ^[2]

CDMA Network Acquisition To Partially Offset Subsidy Impact

China Telecom acquired CDMA network assets from its parent company last year, and thus it does not have to pay network leasing fees. This bodes well for the company as the network leasing fees would have added to the carrier’s cost burden had it not acquired the CDMA network assets. As a result of the network acquisition, in Q1 2013, network operation and support expenses declined by 27% and EBITDA margins (exclusive of mobile terminal sales) improved by almost seven percentage points. ^[3]

China Telecom has seen its profitability decline due to large smartphones subsidies, and the carrier’s iPhone deal with Apple has exacerbated the subsidy impact. On this account, China Telecom’s decision to acquire CDMA network assets provides some relief to its eroding profitability.

Broadband Potential Holds Key

China Telecom is not only the largest broadband service provider in China, but globally as well. With more than 90 million broadband subscribers, the potential for growth is huge as broadband penetration in China has only reached around 40% presently.

Meanwhile, China Telecom has been ambitiously expanding its Fiber-To-The-Home (FTTH) project to provide Chinese households with faster internet access. At the end of 2012, the carrier provided FTTH access to 55 million households with 15 million subscribers choosing to opt for the high-speed service. It is important to note that more than 70% of China Telecom’s subscribers enjoy broadband speeds of more than 4Mbps. The carrier will potentially target these subscribers in future to promote complimentary services such as IPTV and Video-on-Demand. This has the potential to increase the broadband ARPU which has marginally declined over the last few years. ^[4]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. 3G Subscribers, China Telecom [↩]
2. 2012 Investor Presentation, China Telecom [↩]
3. Q1 2013 Results Announcement, China Telecom [↩]
4. 2012 Annual Report, China Telecom [↩]