China Telecom Posts Robust 2013 Results On 3G And Broadband

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China Telecom

China Telecom (NYSE:CHA) reported robust full year 2013 earnings, with net profit growing more than 17% year-over-year (y-o-y) to RMB 17.5 billion ($2.85 billion) and operating revenue growing 13.6% y-o-y to RMB 321 billion ($52.4 billion). This was attributed to the company’s expanding 3G subscriber base and consistent growth in fixed broadband. The carrier added more than 34 million 3G subscribers in 2013, which helped increase its mobile service revenues by about 23% over the prior year. In the fixed line business, China Telecom’s revenues grew over 3%, driven by 6% growth in broadband sales. [1]

On the cost side, operating expenses declined as a percentage of operating revenue, owing to a 20% decline in network leasing costs and other cost-control measures by the company, in addition to revenue growth. The decline in network leasing expenses is a result of acquisition of CDMA network assets by the carrier from its parent company last year. In an effort to expand its 3G and broadband coverage, the company’s capital expenditures (CapEx) increased 60% to RMB 80 billion ($13 billion) in 2013. Although network expansion in 3G/4G and broadband will remain in focus in 2014 as well, the company expects to keep capital costs around 2013 levels going forward on account of increasing CapEx efficiency.

Going forward, carrier plans to roll out its 4G (TD-LTE) service across 100 cities in the country to offer high-speed and high-quality Internet services to urban subscribers. In rural areas, the company aims to expand 3G coverage by focusing on low-end smartphones costing around RMB 299 ($50). China Telecom will also be applying for 4G FDD-LTE licenses, expected to be awarded this year, to launch 4G services for smartphones across the country.

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We currently have a price estimate of $53 for China Telecom, implying a premium of about 30% to the market price. We are in the process of updating our model in light of recent earnings.

See our complete analysis of China Telecom here

Expanding 3G Subscriber Base Boosts Revenues

China Telecom has been quick to capitalize on 3G demand and boasts an industry-leading 3G penetration of over 55%. In comparison, market leader China Mobile (NYSE:CHL) and second-placed China Unicom (NYSE:CHU) have 3G mixes of 25% and 43%, respectively. Despite its already high 3G penetration compared to rivals, the China Telecom was able to add around 34 million 3G subscribers in 2013, representing annual growth of about 4%. Its net 3G additions in the fourth quarter were about 30% lower than its recent quarterly average, which was likely a result of China Mobile expanding aggressively in the second half of the year.

Growth in 3G subscribers propelled mobile data revenues, which now contribute almost 50% to China Telecom’s mobile service revenues. Another positive development for the carrier has been that its mobile ARPU (average revenue per user) has risen from $53.9 ($8.78) in 2012 to $54.8 ($8.93) in 2013, primarily aided by 27% growth in mobile data revenues over the same period. China Telecom’s average monthly data usage for its 3G subscribers increased more than 40% to 190 MB, as the carrier increased its marketing efforts by promoting its web applications and products such as YiChat, Best Pay and e-Surfing Mall.

Fixed Line Business Growing Steadily

China Telecom’s fixed line broadband revenue growth offset the fall in fixed line voice revenues. The broadband division’s revenues grew by 6% y-o-y in 2013 as the carrier continued to bolster its Fiber-To-The-Home (FTTH) penetration. The carrier’s strategy was consistent with the government’s ‘Broadband China’ plan to universalize broadband Internet in the country. China Telecom has around 100 million broadband subscribers, of which more than 20 million are on the faster FTTH network.

China Telecom’s broadband business holds a lot of potential, as China’s broadband penetration presently is only around 40%. Moreover, the carrier might offer higher value services such as IPTV and Video-On-Demand to a majority of its customers going forward, which could potentially increase its broadband ARPU. The only concern for China Telecom in this business could be the growing competition from new players such as China Mobile and stricter government regulations.

Difficult Year Ahead

2014 could be a challenging year for China Telecom as rivals China Mobile and China Unicom up the ante in 3G/4G expansion across the country. The carrier’s wireless subscriber growth has been flat for the first two months this year owing to China Mobile’s aggressive 4G launch and iPhone deal. Since the Chinese government has yet to award FDD-LTE 4G licenses to carriers, China Telecom will have no option but to go slow on its 4G network roll-out. However, this might be a good time for the carrier to consolidate its existing subscriber base and incentivize 2G users to transition to its 3G network. This will not only build a strong base for its future 4G launch but also help it compete against rivals in the near term.

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Notes:
  1. Earnings Call Transcript, Seeking Alpha, March 19 2014 []