How Are Regulatory Directives Hurting China Telecom’s Revenues?

CHA: China Telecom logo
China Telecom

Following the Chinese Government’s directive for the country’s telecom companies to upgrade speed and reduce tariff, shares of China Telecom (NYSE: CHA) have lost 25% of their value since March. In the last two years, even as the company geared-up for 5G launch, the elimination of domestic roaming call and data charges coupled with multiple rounds of reduction in mobile data tariffs to promote the Chinese Government’s Digital China initiative has weighed on its revenues. Despite the significant impact of regulatory requirements on the company’s topline, 4G DOU (average handset data traffic per user per month) surged 62% (y-o-y) to 7.3 GB during the first half of 2019. While lower tariffs have been integral to this surge in data usage, we expect China Telecom’s Revenues to trend lower in 2020 – something we highlight in detail in our interactive dashboard for the company.

A Quick Look At China Telecom’s Revenues

China Telecom reported $57 billion in Total Revenues for full-year 2018. This included three revenue segments:

  1. Data Services: $44.5 billion in FY2018 (78% of Total Revenues). It includes income from wireless data, wireline data, SMS/MMS services, and application services such as IoT.
  2. Voice Services: $7.7 billion in FY2018 (14% of Total Revenues). It represents income from voice calls over the company’s network
  3. Product Sales: $4.8 billion in FY2018 (8% of Total Revenues). The company promotes handset sales bundled with various service discounts as a means to expand its customer base.
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Total Revenues to trend lower in 2020

  • Since 2016, the total revenues have been growing at a low single-digit rate primarily from increasing demand for wireless/mobile data.
  • However, revenue growth turned negative due to the ongoing reduction in mobile and broadband data tariffs.
  • The Data Services segment has been cannibalizing the Voice Services segment as users shifted from traditional network calls to internet-based VoIP calls.
  • Consistent with the directive of a 20% reduction in data tariffs by 2020, we expect China Telecom to continue facing revenue pressure in the near term, despite higher data consumption and widespread availability of 5G services.
  • We expect the company to lose $1.5 billion in total revenues by 2020, from the recent regulatory requirements.

Lower data tariffs leading to a surge in consumption

  • In 2018, China Telecom reported average monthly handset data traffic per 4G user (DOU) of 5.5 GB, growing by more than 100% over the prior year.
  • This growing data consumption trend has continued in 2019, with the company reporting 7.3 GB of DOU in its interim (half-yearly) report.
  • Moreover, IoT smart connections have been growing at an exponential rate with the company adding 26 million new connections during the first half of 2019.
  • This has led to a surge in Application and Information Service revenues, which have been growing at a double-digit rate despite relatively flat overall Data Service revenues.

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