China Telecom Improves High Speed Subscriber Additions With 4G Trial License

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China Telecom (NYSE:CHA) continued to show steady improvement in its performance in the Chinese wireless market in the latter half of 2014, as it gained about 2 million new high speed (3G and 4G) subscribers in December and about 11.4 million high speed users in the last six months of 2014. This is a marked increase in the carrier’s subscriber adds considering that it gained just over 4.1 million high speed users in the first half of last year.

December was also the fifth month last year that China Telecom recorded more monthly high speed user adds than China Unicom (NYSE:CHU), which recorded a gain of 1.15 million, although it still lags significantly behind market leader China Mobile (NYSE:CHL), which reported gains of over 22 million high speed subscribers in the same period. [1] [2] [3]

China Telecom had been struggling with subscriber additions since December 2013, when China Mobile launched its 4G service and formalized the iPhone deal with Apple (NASDAQ:AAPL). However, the carrier started to recover from those losses towards the middle of last year, especially after progressively rolling out its FDD-LTE 4G handset service in July. In addition to the recent 4G trial licenses issued by the government, the third largest Chinese carrier stands to benefit in the near term from the introduction of new 4G handsets on the carrier’s network, a reduction in handset subsidies, a favorable revision to interconnection fees and the establishment of a network infrastructure joint venture (JV) by all the carriers in the country.

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We have a price estimate of $56 for China Telecom, which is about 10% below the current market price.

See our complete analysis of China Telecom here

Full 4G License Expected This Year

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 last year that the company was likely to receive the official hybrid LTE network license by early 2015 but there is no confirmation on this as of now. [4] Nonetheless, this is a significant development because a hybrid 4G network could help the company revive its declining user base, compete against China Mobile and 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 2013 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 added about 144 million high speed subscribers in 2014, accounting for over 77% of all high speed user adds in the country in this period. In comparison, China Telecom managed to add only about 15.5 million 3G/4G users, accounting for just over 8% of all high speed user adds.

China Telecom: The Road Ahead

China Telecom now has approval to expand its 4G network trial to 56 cities across the country. The carrier earlier stated that it planned to invest about RMB 80 billion ($13 billion) in capital expenditures last year, half of which were to be spent on rolling out its 4G network. With expectations of a full license this year, we expect China Telecom to start expanding its 4G presence across the country aggressively and improve its monthly subscriber additions going forward. The carrier has set an ambitious target of 120 million new user adds in 2015, 100 million of which are expected to be 4G customers.

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Notes:
  1. Key Performance Indicators, China Telecom, Jan 2015 []
  2. Operating Data, China Unicom, Jan 2015 []
  3. Operation Data, China Mobile, Jan 2015 []
  4. Trial 4G license granted, The Standard, June 24 2014 []