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Investment Overview for China Telecom (NYSE:CHA)
Mobile Voice Service and Mobile Phones
- Mobile Service & Phones EBITDA Margin:We estimate that this figure will increase from about 17% in 2015 to around 19% by 2022, driven by lower subsidy costs on mobile phones and better economies of scale for wireless services although this could be partially offset by higher tower rental expenses, post the company's decision to spin off about 170k to the China Tower Joint venture. However, if the company's margins exceed out expectations and grow to above 22%, there could be a 10% upside to our price estimate. On the other hand, if margins decline to around 15% owing to competitive pressure, there could be a 10% downside to our price estimate.
- Average Monthly Mobile Revenue Per User:We estimate that this figure will increase from about $8.30 in 2015 to about $10.50 by the end of our forecast period due to increasing popularity of smartphones in China and growing data usage on 3G and 4G technologies. If ARPU rises to about $12 by 2022, there could be a 10% upside to our price estimate. Alternatively, if ARPU remains flat at current levels, there could be a decline of about 10%.
- Average Monthly Broadband Revenue Per User: We estimate that this figure will decrease marginally from $9 in 2015 to $8.80 by the end of our forecast period mainly because of competition and increasing penetration in low-income areas. However, there could be an upside of about 10% to our price estimate if this figure increases to $11. There could be a downside of similar nature if the figure falls to $7.50. This largely depends on the growth that fixed-line broadband internet will see considering availability of more convenient mobile and wireless internet.
China Telecom is a telecom service provider based out of China. It offers both mobile and landline services. It makes its money primarily through wireless telecom and landline services such as broadband Internet and voice services. The company is currently focusing on expanding its 4G services across the country.
The mobile business and broadband internet businesses are expected to be the growth drivers for the company.
The Mobile Services and Phones division constitutes majority of China Telecom's value mainly because of the following reasons:
Large customer base
China Telecom's mobile division had a customer base of close to 200 million users, while its broadband internet subscriber base stood at 113 million.
High Average Revenue Per User
The monthly average revenue per mobile user was $8.30 in 2015 which is lower than the $9 that an average broadband user pays. However, mobile ARPUs are on the rise bolstered by data usage as opposed to broadband ARPUs. By the end of our forecast period, mobile ARPUs will have risen to close $11 while broadband ARPUs will have declined to under $9, per our estimates.
Collaboration with China Unicom
China Telecom signed a multi-pronged strategic agreement with China Unicom in early 2016 to share resources, enabling the two carriers to cut costs and better compete with larger and better capitalized rival China Mobile. Notably, the two carriers will team up for their rural 4G network build out, allowing them to save on network equipment and operation costs. The two carriers have formulated projects for sharing about 60k 4G base stations and about 14,500km of transmission fibre cables.
Wireless subscriber growth is slowing in China
While there remains some potential for new subscriber growth in rural markets, the broader Chinese wireless market is slowing down. Wireless subscriber growth in China has slowed from 15%+ levels seen in 2008 and 2009 to levels of under 2% in 2015. China had a total of about 1.3 billion wireless customers as of December 2015, just slightly below its population of roughly 1.4 billion.
Increasing smartphone sales
China is now the largest smartphone market in the world by volume. According to Strategy Analytics, about 438 million smartphones were sold in China in 2015. Increasing smartphone adoption will help drive data revenues up since the average revenue per user generated from someone using a smartphone is far higher than customers on feature phones, who only use text and voice services.
Increasing 4G adoption
Data consumption represents the basis for growth for most wireless carriers and China Telecom has been deploying the latest network technologies to improve data speeds and throughput, enticing customers to consume more data. As of May 2016, about 41% of the company's mobile billing subscribers (about 85 million users) were on 4G plans. Growing standards of living and an increasing supply of economical yet high-quality smartphones should drive the the smartphone adoption rate up, consequently boosting data revenues.
Subsidies on mobile handsets
Like the other two Chinese carrier, China Telecom attracts customers with subsidies on the mobile handsets that it sells. The high subsidy costs put pressure on the company's mobile profit margins. However, in 2014 the Chinese government asked the three carriers to rein in spending on subsidies and advertising and it is likely that these costs could decline going forward. China Telecom's subsidy expenditure fell 24% in 2015.
Government-mandated restructuring in the Chinese Telecommunications Industry
The telecommunications industry in China is largely regulated by the Government. Restructuring initiatives were taken in 2008-09, leading to merging and de-merging of landline and mobile businesses across companies. As a result of the shuffle, only 3 companies remained in the telecom sector and China Telecom acquired China Satcom and China Unicom's CDMA business in the process. While the last restructuring was beneficial for China Telecom, we cannot be sure it will be so the next time government decides on a reshuffle. Frequent restructuring could hinder the company's long-term plans and create uncertainty for equity holders.
Tariff Regulations by the Chinese government
Being state-controlled, China Telecom experiences frequent government intervention in its business in the form of tariff ceilings. Since prices are not decided by the market forces but by the government, we cannot identify a trend in market prices to forecast the risk. Government-mandated tariff adjustments may come without warning and affect profitability if the tariffs are lowered. Frequent regulations also serve to limit the company's flexibility to respond to changes in the environment and market conditions.
Diversification away from China
Telecom companies around the world such as Deutsche Telekom, Telefonica, Vodafone and Bharti Airtel have diversified their businesses to mitigate the risks of operating in only one environment. China Telecom's businesses are currently concentrated in China only, leaving it open to risks associated with China's future growth and government regulations. That said, China Telecom has been taking small steps to diversify internationally via a wholly owned subsidiary called China Telecom Global Limited.
Substitution of landlines with Mobile Phones
Due to ease-of-use and convenience, increasing number of people are substituting their landlines with mobile phones. Newer technologies like VoIP have ensured that a fixed line is no longer needed for voice services. All the major incumbent telecom carriers, including China Telecom and China Unicom have been losing lines, as customers move on to VoIP or wireless services.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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