After a year where revenue grew less than 1%, China Telecom (CHA) looks ready to reverse its bad fortunes just one month after winning 4G LTE FDD licenses from China's industry regulator. China Telecom suffered last year mainly because it lacked a 4G network. Meanwhile, competitor China Mobile (CHL) was happy to take China Telecom's lost customers, spending $35 billion in capital expenditures to build a 4G network and gaining 90 million 4G users all last year; China Mobile is expected to gain another 110 million 4G subs this year. Hence, up until this point, China Mobile has had a huge advantage over its competitors, but now China Telecom looks ready to play catch up, and quickly.
Last month, when the Chinese government gave China Telecom full FDD-LTE licences, the company gained access to the fast-growing high-performance data and mobile video markets. Given the fact that it did not have access to these markets, on a large scale, in the past, it is really a wonder that sales were flat last year. After all, China Mobile was able to offer customers a much superior network for devices (iPhone, Galaxy) that are optimized for use with 4G networks.
That said, China Telecom is not wasting any time, already having plans to roll out LTE services in 40 cities - and this includes top provinces within China. To speed the process, China Telecom has partnered with Alcatel-Lucent (ALU), who will initially provide its 9926 eNodeB RAN technology to extend China Telecom's 4G LTE network's coverage. Then, as China Telecom attracts new subscribers, and its spectrum becomes more crowded, the company will use Alcatel-Lucent's 7950XRS routing system, which has been universally chosen across the globe by wireless companies due to it being the world's most powerful core router.
While Alcatel-Lucent is also helping China Telecom's competitors China Mobile and China Unicom build their 4G networks, fact of the matter is that Alcatel-Lucent's presence and new licenses give China Unicom a level playing field. Furthermore, the fact that it has wasted no time in planning to expand into these new cities is a good indication that it realizes the sense of urgency that exists to catch China Mobile.
All things considered, expect heavy spending from China Telecom this year, much like China Mobile last year. However, expect a big payoff. Last year, China Mobile's data revenue rose 43% year-over-year, mainly because faster networks and newer mobile devices consume more data than older 3G networks. Therefore, at under 14x next year's earnings, and given the rate that new 4G customers are being added to China Mobile's business - China Telecom will have that same opportunity - China Telecom finally looks like a great long-term 4G-related investment opportunity.
