China Telecom Shows Improvement In Subscriber Adds; 4G Likely To Provide Further Boost

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China Telecom (NYSE:CHA) reported a steady improvement in its performance in the Chinese wireless subscriber market in July, as it gained about 1.45 million new 3G subscribers. This marked the fifth consecutive month of improvement in 3G user adds for the carrier, although it still lags significantly behind rivals China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU), which reported gains of about 9 million and 2.5 million high speed (3G and 4G) subscribers, respectively, in the same period. [1] [2] [3]

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. This is evident from the fact that China Telecom has lost over 5.5 million subscribers (net of 2G declines and 3G adds) in the last seven months, and its share in the Chinese wireless market has declined by about 80 basis points to 14.2%. In the same period, China Mobile increased its share by 30 basis points to 62.5% and China Unicom’s share improved 50 basis points to 23.3%.

We have a price estimate of $55 for China Telecom, which is about 10% below the current market price.

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See our complete analysis of China Telecom here

New 4G Network Likely to Improve Subscriber Adds

The Chinese government recently awarded China Telecom a trial license for setting up its 4G network on a combination of the FDD-LTE and TD-LTE technology standards. A report in the media also suggested that the company is likely to receive the official hybrid LTE network license by early 2015. [4] This is a significant development because a hybrid 4G network could help the company revive its declining user base, compete against market leader China Mobile and second largest carrier China Unicom and regain its lost share in the Chinese wireless market. China Telecom had so far refrained from aggressively developing a 4G network because the TD-LTE 4G licenses awarded by the government in December last year were incompatible with the carrier’s existing WCDMA 3G technology.

China Mobile is the only carrier in the country with an established 4G network, because its homegrown TD-SCDMA 3G network is fully compatible with the TD-LTE technology. Owing to its network compatibility and first mover advantage, China Mobile has been able to race ahead of rivals in attracting new subscribers. It has added about 70 million high-speed subscribers in the last seven months. In comparison, China Telecom managed to add only about 5.5 million high-speed users, which was about half of its 2G subscriber losses (11.1 million) in the same period.

China Telecom recently reported that the Ministry of Industry and Information Technology (MIIT) has given it permission to expand its 4G network trial to an additional 24 cities including Beijing and Guangzhou, taking its total coverage to 40 cities across the country. ((Press Release, China Telecom, Aug 28 2014)) China Telecom Chairman Wang Xiaochu had earlier stated the company’s plans to invest about RMB 80 billion ($13 billion) in capital expenditures this year, half of which would be spent on rolling out its 4G network. With the trial 4G license in place, we expect China Telecom to aggressively start expanding its 4G presence across the country and improve its monthly subscriber additions going forward.

Network JV Could Boost Subscriber Adds

After more than two months of extensive discussions, all three leading Chinese telecom service providers finally reached an agreement to establish the country’s first joint network infrastructure company in July this year. The joint venture (JV), to be called China Communications Facilities Services Corporation Limited, will be involved in building telecom towers, base stations and other transmission assets for the telecom industry. [5] [6] Reflecting on the positives of such a JV, the MIIT had earlier stated that such a move could help protect the environment and conserve resources, in addition to lowering network construction costs for the telecom industry. [7]

The JV is expected to help the carriers, especially China Telecom, in avoiding overlapping investments and duplication of work related to building network infrastructure in the country. Considering the differences in technology of China Mobile’s 4G network (TD-LTE) and China Telecom’s proposed hybrid network (FDD-LTE and TD-LTE), the latter will have to spend on developing FDD-LTE 4G infrastructure in the near term on its own and it is unlikely to gain significantly from China Mobile’s network in this regard. However, it will be able to utilize the market leader’s telecom infrastructure for providing interoperability among different network standards to its subscribers. With the availability of low-cost five-mode handsets (providing global support for TD-LTE 4G, FDD-LTE 4G, TD-SCDMA 3G, WCDMA 3G , and GSM 2G) improving in the country, we expect China Telecom to take advantage of network interoperability to improve resource utilization efficiency, reduce operating costs and protect gross margins in the near term.

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Notes:
  1. Key Performance Indicators, China Telecom, Aug 2014 []
  2. Operating Data, China Unicom, Aug 2014 []
  3. Operation Data, China Mobile, Aug 2014 []
  4. Trial 4G license granted, The Standard, June 24 2014 []
  5. Press Release, China Mobile, July 11 2014 []
  6. Press Release, China Unicom, July 2014 []
  7. Press Release, MIIT, April 30 2014 []