China Telecom (NYSE:CHA) is planning to expand its operations in Europe by offering wireless services under its own brand, starting this year. According to Bloomberg, the Chinese operator will roll out its first overseas wireless service in the U.K. by March end and may expand to France and Germany if successful. ((China Telecom May Expand to France, Germany After U.K, Bloomberg, December 5th, 2011)) State-owned China Telecom is China’s largest land-line operator and also the third-largest wireless provider after China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU).
The company will offer wireless services as a mobile virtual network operator (MVNO) and target Chinese citizens living in these countries. A MVNO has no spectrum of its own and has to lease out some other company’s spectrum. China Telecom’s U.K service will run on the network of Everything Everywhere, the joint venture between France Telecom and Deutsche Telekom. Continuing on this relationship, we expect China Telecom to use these carriers’ networks in their respective countries when it expands into France and Germany.
Our price estimate for China Telecom is $68, which is about 20% ahead of the current market price.
MVNO in U.S. as well
In addition to Europe, China Telecom has expansionary interests in the U.S. as well. We discussed earlier how China Telecom could look to roll out a stateside MVNO service by entering into agreements with either Sprint or Verizon, as both of them operate networks that run on the same CDMA technology as China Telecom’s. (see China Telecom to Enter U.S. Wireless Market in 2012)
If the telecom provider’s plans outside China take off, it might be interested in building out infrastructure for its own network instead out leasing out some third-party’s. However, such a ploy may face opposition from the U.S. and European governments, who are wary of growing global Chinese presence. (see China Telecom’s Planned US Entry Fraught with Risks)
Diversification Good for Business
We see this move by China Telecom as a way of diversifying its business outside China. Telecom companies around the world such as Deutsche Telekom, Telefonica, Vodafone and Bharti Airtel have diversified their businesses globally to mitigate the risks of operating in a single environment. However, China Telecom’s business has so far remained concentrated in China, leaving it open to risks associated with China’s future growth and government regulations. With its current plans to diversify into Europe and the U.S., the company is looking to somewhat mitigate that risk.
The market for consumers who need mobile phones that operate both in China and Europe/U.S. is limited. There are 2 million Chinese living in western Europe currently.  According to the U.S. Census Bureau, there were 3.8 million Asians of Chinese descent living in the U.S. in 2009.  So it’s a good opportunity for the company to gain a toehold into a new market by addressing the needs of a niche, before it unleashes bigger and more ambitious overseas plans.Notes: