Why We Remain Bullish On China Telecom

China Telecom (NYSE:CHA), the smallest of the three wireless carriers in China, has seen its wireless and wireline broadband subscriber base expand over the last few quarters, with its long-term outlook also remaining reasonably strong amid increasing demand for data services.  We currently have a $59 price estimate for the company, which is roughly 20% ahead of the current market price. Below we provide some of the key factors driving our bullish stance on the firm.

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

• China Telecom remains the fastest growing wireless carrier in China. In April, the carrier added 2.5 million subscribers, compared to larger rival China Unicom, which added just about 1 million subscribers. Although China Mobile added about 3.5 million subscribers, its wireless base is almost 4x as large as China Telecom’s. This growth is driven partly by China Telecom’s stronger 4G coverage (740k base stations for China Unicom versus 890k for China Telecom as of December 2016) as well as its head start in densely populated areas.

• While the Chinese government has been taking steps to reform the telecom market, asking the three carriers to end long-distance calling and roaming fees by this September, China Telecom is unlikely to see a significant revenue impact from the move. The carrier’s improving data revenues and rising 4G mix (64% of total base) should allow it to largely mitigate this impact. Moreover, the carrier recently launched a new RMB 199 (~$29) unlimited data plan, which could help it to improve its ARPU.

• China Telecom’s broadband subscriber base increased by about 2.7 million over the last quarter, with net broadband adds coming in at 6.07 million. While that number is well below China Mobile, which signed on 8 million new broadband subscribers over Q1 driven by competitive pricing, China Telecom remains the market leader in the wireline broadband space, with a customer base of roughly 126 million.

• Last year, China Telecom signed a multi-pronged strategic agreement with China Unicom (NYSE:CHU) to share resources, enabling the two carriers to cut costs and better compete with larger and better capitalized rival China Mobile (related: China Unicom And Telecom Deepen Cooperation With 4G Resource Sharing Agreement). The two carriers teamed up for their rural 4G network build out, allowing them to save on network equipment and operation costs, providing scope for margin improvement.

• The China Tower joint venture, which is the spin-off entity that runs infrastructure for Chinese carriers, intends to file for an initial public offering shortly. The company is reportedly looking to float between 10-20% of its shares, raising as much as $10 billion, most of which would be returned to the three major carriers. China Telecom is likely to be a big beneficiary of this, as it decided to take a bulk of its compensation in the form of equity (it holds a 27.9% stake in the entity), rather than cash. This could provide it with a relatively strong cash infusion following the IPO.

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