Key Takeaways From China Telecom’s Q3 Earnings

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China Telecom

China Telecom (NYSE:CHA) had a reasonably strong third quarter, aided by incremental subscriber additions, continued migration to the company’s 4G LTE network and better cost management. While Q3 revenues grew by about 4.8% year-over-year  to RMB 81.364 billion ($12.8 billion), based on numbers we derived from the carrier’s 9-month results published on Wednesday, net income grew by about 5.5% year-over-year to about RMB 14.68 billion ($2.31 billion). In this note, we briefly review some of the company’s key operating metrics and discuss trends that are likely to drive results going forward.

We have a price estimate of $60 for China Telecom, which is about 15% ahead of the current market price. We will be revisiting our valuation model and price estimate to update for the earnings release.

See our complete analysis of China Mobile | China Unicom | China Telecom

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Subscriber Growth Drives Revenues

China Telecom and its larger rival China Unicom (NYSE:CHU) received full FDD-LTE licenses this February, allowing them to operate their 4G services across the country. However, Unicom’s 4G coverage has turned out to be weaker than expected, causing many customers looking for high-speed services to defect to China Telecom and larger rival China Mobile. China Telecom added a total of 8.72 million subscribers since the beginning of this year, taking its total wireless user base to 194 million users. The carrier added a net of 36.65 million 4G terminal users for the first 9 months of the year, taking its total 4G base to 43.73 million users. Separately, the carrier’s wireline broadband business also did fairly well, adding about 4.14 million subscribers year-to-date for a total of 111.09 million at the end of the quarter. In the table below, we provide a snapshot of the Chinese wireless market at the end of September 2015.

China_Telecom_September

Data Usage Soars, ARPU Mostly Flat On Price Regulation

China Telecom has been seeing solid growth in data usage as a result of its LTE migrations, with data traffic growing by 94% year-over-year for the first three quarters of the year. However, despite the soaring consumption, the carrier’s ARPU for the first 9 months stood at about RMB 55.5 ($8.66), representing a very moderate increase from FY 2014. There could be multiple reasons for this. For one, the Chinese government’s has ordered carriers to reduce per-unit pricing for data services, with China Telecom indicating in May that tariffs would fall by an average 30% per megabyte by the end of this year. The potential decline in traditional messaging usage by subscribers – who are gradually shifting towards cheaper and more popular over-the-top applications such as WeChat – could also have been a factor weighing on ARPU growth. The carrier also introduced an unused data carry-forward policy beginning from October, and this could hurt ARPU and profitability going into Q4. [1]

Cost and Capex Outlook Could Improve On Tower Sharing Joint Venture

Apart from growing data usage, cost management is also likely to be big driver of earnings growth in a saturating Chinese telecom industry – which is contending with a slowdown in macroeconomic growth and mounting competition for subscriber additions. While China Telecom’s overall operating expenses grew modestly for the first nine months, it made significant progress in reducing selling, general and administrative costs. Costs could be better managed going forward, as Telecom is expected to be one of the biggest beneficiaries of the tower sharing joint venture that it is setting up along with China Unicom and China Mobile. The venture would give it access to a larger base of tower infrastructure, helping to quickly and effectively enhance its 4G network roll-out – particularly in suburban and rural areas – while allowing for lower capital expenditures and network operations costs. The carrier holds just 125,000 towers versus the 450,000 and 190,000 towers held by its larger peers China Mobile and China Unicom. [2]

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Notes:
  1. KEY FINANCIAL AND PERFORMANCE INDICATORS FOR THE FIRST THREE QUARTERS OF 2015, China Telecom, October 2015 []
  2. Why China Unicom Benefits The Most From Tower Reform, MarketWatch []