Full License Sets Stage For China Telecom’s Aggressive 4G Coverage Expansion

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China Telecom

The Chinese government has finally granted the much awaited FDD-LTE licenses to wireless carriers China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU) to operate 4G services across the country. The government granted trial licenses to these carriers in June to start their 4G operations on a hybrid TD-LTE/FDD-LTE technology standard in select cities in the country. Notwithstanding the limitations in expanding its 4G network coverage, third largest wireless carrier China Telecom added 11.4 million high speed (3G and 4G) subscribers in the latter half of 2014 compared to its tally of just 4.1 million adds in the first six months last year. Now, with the full licences in place, we expect the carrier to aggressively expand its 4G network coverage and boost its monthly high speed user adds. [1] ((Key Performance Indicators, China Telecom, Feb 2015)) [2] [3]

Currently, market leader China Mobile (NYSE:CHL) is the only carrier in the country with an established 4G network, because its homegrown TD-SCDMA 3G network is fully compatible with TD-LTE 4G technology, licenses for which were granted by the Chinese government in December 2013. 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.

We have a price estimate of $56 for China Telecom, which is about 15% below the current market price.

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See our complete analysis of China Telecom here

Aggressive 4G Target

China Telecom has set an ambitious target of 120 million new user adds in 2015, 100 million of which are expected to be 4G customers. It reported a gain of about 2.1 million high speed users in January and is expected to have added a similar figure in February as well. This means that China Telecom will need to add an average of 9.5 million 4G subscribers every month going forward to reach its goal. We expect the carrier’s high speed user adds to improve gradually from their current monthly average of about 2 million to double-digit figures towards the latter half of the year.

About 35% of China Telecom’s 187 million total wireless customers are still on the slower 2G network, and the carrier is likely to encourage these customers to directly upgrade to 4G with discounts and special scheme offerings, in addition to encouraging its 3G customers to adopt the higher speed 4G. It is also likely to target 2G customers on rival networks considering that overall 3G-4G mix in China’s overall wireless market is less than 50%. This essentially means that there are still about 676 million potential 3G-4G customers in China, which is over two times the U.S. population.

In addition to the full 4G license, China Telecom 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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Notes:
  1. Press Release, China Telecom, Feb 27 2015 []
  2. Operating Data, China Unicom, Feb 2015 []
  3. Operation Data, China Mobile, Feb 2015 []