China Telecom (NYSE:CHA) may be the smallest wireless carrier in China, but its subscriber base of over 160 million easily puts most wireless carriers in the developed world to shame. The largest wireless carrier in the U.S., Verizon (NYSE:VZ), has about 110 million total connections currently, and it operates in an increasingly saturated market. On the other hand, China’s 3G penetration is only about 17% and is likely to increase in the coming years as smartphone makers target China. As a result, China’s smartphone market is growing by leaps and bounds and recently surpassed the U.S. in terms of active smart devices according to Flurry Analytics. 
Armed with the iPhone, the Lumia, as well as a horde of cheaper Android handsets, China Telecom looks set to ride the widespread 3G transition in the coming years. We have a $65 price estimate for China Telecom stock, which is about 25% ahead of the current market price.
3G Market in China is an Equitable Mix
China Telecom experienced 90% growth in 3G subscribers in 2012, outpacing the nearly 80% growth experienced by China’s 3G market. The increased subscriber base was in no way nudged by the fact that China Mobile currently runs its 3G network on a homegrown proprietary TD-SCDMA, a standard that is not compatible with many smartphones. Unless Apple launches a China Mobile compatible iPhone, China Telecom will continue to reap benefits of a strong Apple product fan base.
3G To Bolster Data Revenues
While the arrival of the iPhone on China Mobile could potentially be a huge blow to China Telecom, it is a good sign that the carrier is not banking on the popular smartphone alone to drive 3G adoption. The carrier recently came up with a strategy to sell low-cost 3G smartphones made by ZTE (OTCPK:ZTCOF), Huawei and Lenovo (OTCPK:LNVGF) that run on its 3G network. Considering that the Chinese market is still in an evolving stage, the demand for cheaper Android smartphones is huge. Even Nokia (NYSE:NOK), which is trying to push its Lumia line of smartphones and create a third ecosystem with Microsoft (NASDAQ:MSFT), is launching Lumia handsets at lower price ranges.
China’s huge potential is fostering healthy competition among handset makers and this will help China Telecom manage its subsidies better so as to lessen the impact on its margins going forward. This is very important as it can avoid the mistakes made by its American counterparts in phone subsidies.
Driving 3G adoption will serve to drive the ARPU levels of China Telecom further as has been the case in the developed world. Carriers such as Verizon, AT&T (NYSE:T) and Sprint (NYSE:S) in the U.S. have seen rapid growth in mobile data revenues over the past few years driven by growing demand for 3G/4G-capable smartphones. This has come even as their voice ARPUs declined, a trend that can be seen in the Chinese telecom market as well. We expect to see China Telecom’s mobile ARPUs to continue to increase in the coming years as 3G demand bolsters data ARPUs further.
- China Knocks Off U.S. To Become Largest Smart Device Market, Feb. 18, 2013
Disclosure: No positions