China Telecom Continues To Struggle In Attracting Wireless Subscribers

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China Telecom

China Telecom‘s (NYSE:CHA) sluggish performance in the Chinese wireless market continued as it reported a meager increase of 220,000 mobile subscribers in February, taking its total subscriber count to 185 million. The carrier added about  800,000 3G subscribers which was offset by declining 2G subscriptions. Although the carrier recorded a significant improvement in 3G additions over its January tally of 30,000, its performance is still lacking in comparison to rivals. Market leader China Mobile (NYSE:CHL) and second largest carrier China Unicom (NYSE:CHU) added 9.5 million and 2.5 million 3G subscribers, respectively, in the same period. ((Key Performance Indicators, China Telecom, March 20, 2014)) [1] [2]

China Telecom has been struggling with subscriber additions since December last year, when China Mobile launched its 4G service and formalized the iPhone deal with Apple (NASDAQ:AAPL). Increased competition in the 3G market and aggressive 4G network expansion by China Mobile seem to be weighing on China Telecom’s performance. We expect competition to increase going forward as China Unicom is also likely to roll-out 4G (TD-LTE) smartphones very soon. [3]

We have a price estimate of $51.53 for China Telecom, which is about 20% ahead of the market price.

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See our complete analysis of China Telecom here

Strong Competitors Making Subscriber Growth Difficult

China Telecom leads the Chinese wireless market in 3G penetration, with over 56% of its total subscribers using 3G services, as compared to China Mobile’s 28%. China Telecom has done well since it entered the wireless market, increasing its market share from only 4% in 2008 to about 15% by the end of last month. In comparison, China Mobile’s market share declined from over 71% to 62% in the same period.

China Mobile’s 3G efforts were hindered by the fact that many handsets were not compatible with its proprietary 3G TD-SCDMA technology. This allowed China Telecom to gain substantial share in the 3G market because it used the more internationally accepted WCDMA standard, which was compatible with more popular smartphones, including the iPhone. However, with chipset advancements, many of the popular smartphones are now compatible with China Mobile’s 3G TD-SCDMA standard as well, giving China Telecom less of an advantage with respect to its more mature 3G technology (WCDMA). In addition to this, China Mobile’s aggressive marketing and higher handset subsidies is making it harder for China Telecom to gain market share.

China Unicom is also expected to significantly add to the carrier’s competition. Even as China Telecom has struggled, China Unicom has been able to sustain its subscriber growth on account of its faster 3G network and better marketing strategies. Its 42M service, referred to as 3.75G by the Chinese media, offers 4G-comparable Internet speeds of up to 42 Mbps to subscribers.

Going forward, China Telecom will need to aggressively market its 3G products, improve user experience and potentially offer higher subsidies if it wants to effectively gain from the rapidly expanding 3G and 4G markets in China. This may put pressure on its margins in the near term, but it would be worth the price if it improves its long-term competitive position.

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Notes:
  1. Operating Data, China Unicom, March 20, 2014 []
  2. Operation Data, China Mobile, March 20, 2014 []
  3. Chinese telecom operators step up 4G price competition, WantChinaTimes, March 23 2014 []