China Telecom Earnings Preview: Rising Competition Likely To Weigh On Margins

CHA: China Telecom logo
China Telecom

China Telecom (NYSE:CHA) is expected to release its first quarter 2014 earnings on Monday, April 28. The Chinese telecom carrier reported robust full-year 2013 earnings last month, with net income growing more than 17% year-over-year (y-o-y) to RMB 17.5 billion ($2.85 billion) and operating revenue growing 13.6% to RMB 321 billion ($52.4 billion). The company gained on the back of a rapidly expanding 3G subscriber base and consistent growth in fixed broadband. The acquisition of CDMA network assets from its parent company China Telecom Corporation last year also helped improve margins, as it saved on network leasing expenses. However, the company’s growth started to slow down towards the end of 2013 in the wake of increased competition in the 3G/4G market. In fact, the carrier reported a nominal 3% sequential increase in revenues and a 37% sequential drop in net income in the fourth quarter last year. [1]

In its earnings release, we expect the company to report low single-digit y-o-y growth in operating revenues on account of a steady increase in fixed broadband users, but a weak quarter in terms of wireless subscriber growth. The third-largest Chinese wireless carrier gained just 830,000 3G subscribers in the first two months of the quarter compared to market leader China Mobile‘s (NYSE:CHL) 24 million and second placed China Unicom‘s (NYSE:CHU) 6.4 million adds. Going forward, we expect China Mobile’s aggressive expansion in the 3G/4G market and rising tariff pressures (of monthly voice and data plans) to weigh on China Telecom’s subscriber additions and margins.

We currently have a price estimate of $52 for China Telecom, implying a premium of about 15% to the market price.

Relevant Articles
  1. Is The Market Undervaluing Chinese Telcos: A Comparison With Verizon & AT&T?
  2. How Are Regulatory Directives Hurting China Telecom’s Revenues?
  3. A Closer Look At China Telecom’s Key Revenue Streams
  4. How Has China Telecom’s Wireless Business Fared Versus Rivals?
  5. What To Expect As China Telecom Reports Q1 Results
  6. Key Takeaways From China Telecom’s 2018 Results

See our complete analysis of China Telecom here

Consistent Broadband Subscriber Growth To Drive Revenues

China Telecom is the largest broadband service provider in China, with a share of more than 52% in a 200 million subscriber market. [2] This market has grown at a rapid pace historically, and is likely to continue in the future as the government implements its “Broadband China” strategy to universalize broadband usage in the country. Broadband penetration in the country is currently around 40%. The carrier’s 101 million subscribers are mainly concentrated in southern China, where it enjoys a near-monopoly. The other major player in fixed broadband, China Unicom (NYSE:CHU), has a share of 35% and mainly provides broadband services in the northern part of the country.

In 2013, China Telecom’s broadband revenues increased over 6% to about RMB 71 billion ($11.5 billion) owing to an 11% increase in the number of subscribers and rising Fiber-To-The-Home (FTTH) penetration. Considering that the company consistently gained subscribers in the first two months of this year as well, we expect broadband revenues to continue their single-digit growth in Q1 2014.

Growing Competition In 3G/4G Likely To Impact Margins

China Telecom has historically done well in expanding its subscriber base in the Chinese wireless market. It increased its market share from just over 4% in 2008 to 14.7% at the end of February 2014. The carrier also leads the Chinese wireless market in 3G penetration, with over 56% of its total subscribers using 3G services. However, the carrier has lagged behind rivals in the past few months in attracting subscribers to its high speed 3G services.

The carrier added just 830,000 new 3G subscribers in the first two months of Q1 this year, compared to an average monthly increase of about 3 million last year. This is attributed to increased competition in the Chinese wireless market, especially with China Mobile upping the ante with its 3G expansion and 4G launch. Since China Telecom launched its 4G service only towards the end of February, we do not expect 4G to substantially impact the company’s Q1 earnings. We expect the carrier’s slow subscriber growth and market competition to remain a drag on the company’s margins in the next few quarters.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

  1. China Telecom Company Website []
  2. Mainland China Telecoms Statistics, Marbridge Consulting, 2013 []