Stagnating 3G Subscriber Additions A Concern For China Telecom

| About: China Telecom (CHA)

China Telecom (NYSE:CHA) witnessed a massive decline in its 3G subscriber additions last month, according to the monthly subscriber data released by the company. The third largest wireless carrier in China added only 30,000 new 3G subscribers in January, compared to 730,000 in the previous month. In comparison, market leader China Mobile (NYSE:CHL) and second largest wireless carrier China Unicom (NYSE:CHU) added about 14.2 million and 3.8 million 3G subscribers, respectively, in the same month.

China Telecom's declining subscriber adds can be attributed to increasing competition in the Chinese wireless market, especially with China Mobile upping the ante with its 4G network expansion across the country and the iPhone launch. China Mobile is currently the only carrier in the country that offers 4G services for smartphones, while China Telecom only offers 4G data cards and China Unicom has yet to launch 4G.

We have a price estimate of $53 for China Telecom, which is about 15% ahead of the market price.

China Telecom's Loss Is China Mobile's Gain

China Telecom's total subscriber base at the end of January 2014 stood at about 185 million, about 800k lower than a month ago. Taking into account the increase in 3G subscribers in this period, China Telecom actually lost about 830k 2G subscribers last month. Generally, a loss in 2G subscribers is considered natural since it leads to a corresponding increase in 3G, indicating a transition of users from 2G to 3G. However, China Telecom's 3G subscribers did not increase in proportion to its loss in 2G, which raises the question of who is gaining most from China Telecom's loss of subscribers.

It seems that most of China Telecom's defecting subscribers are moving to China Mobile's network. In the month, China Mobile witnessed unprecedented growth in its 3G subscriber base, with over 14 million new 3G subscribers compared to a monthly average of about 9 million additions in the last six months. This is likely a result of pent-up demand for China Mobile's high-speed network over the last couple of months, as customers delayed their smartphone purchases to take advantage of improving handset options as well as its 4G launch on January 17. In addition to record 3G subscriptions, China Mobile witnessed its largest monthly decline in 2G subscribers - about 9.6 million.

The data coming from China Mobile, coupled with the fact that China Unicom’s 3G subscriber growth maintained its recent pace of 3.5-4 million per month, is a cause for concern for China Telecom as it seems to be the only carrier that is struggling from a subscriber standpoint. If the subscriber loss turns out to be more than just an anomaly, there could be a downside to our price estimate for the company’s stock. In any case, China Mobile’s return to strength in 3G/4G and its rapidly increasing subscriber base remains the most potent threat to China Telecom’s growth in the coming years.

China Telecom Needs A Better 3G Strategy

China Telecom will need to take corrective measures in order to maintain its standing in the Chinese wireless market, as it appears to be losing its long-standing technology advantage over market leader China Mobile. Not only is China Mobile rolling out 4G services for smartphones ahead of peers, but also promoting its 3G network successfully. In the past four years, China Mobile’s 3G efforts were hindered by the fact that many handsets were not compatible with its proprietary 3G TD-SCDMA technology. This allowed China Telecom and China Unicom to gain substantial share in the 3G market because they used the more internationally accepted WCDMA standard, which was compatible with more popular smartphones, including the iPhone.

However, with chipset advancements, many of the popular smartphones are now compatible with China Mobile’s 3G TD-SCDMA standard as well, giving China Telecom less of an advantage with respect to its more mature 3G technology (WCDMA). Therefore, China Telecom will need to aggressively market its 3G products, improve its user experience and potentially offer higher subsidies if it wants to effectively gain from the rapidly expanding 3G and 4G markets in China. This may put pressure on its margins in the near term, but it would be worth the price if it improves its long-term competitive position.

Disclosure: No positions

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