China Telecom Attractive on Broadband Expansion Plans

| About: China Telecom (CHA)
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China Telecom (NYSE:CHA) has expanded its businesses primarily by recruiting new consumers rather than introducing new services. Essentially, the carrier has been selling down their demand curve.

China Telecom, a newcomer to China's mobile market, operates the country's largest fixed-line network and is aggressively promoting broadband over that channel. It remains the smallest mobile operator in China with 94 million users at the end of January, compared to 170 million at China Unicom (NYSE:CHU) and 589 million at China Mobile (NYSE:CHL).

Its number of broadband subscribers rose 18.7 percent in 2010 from the prior year to 63.5 million, as the company focused on attracting higher-yielding customers to make up for a fall in revenue from its mainstay fixed-line operations.

Like its peers in more developed economies, China Telecom has been seeing revenue from its core fixed-line operations slip as more users migrate to mobile. The company has been trying to push data and value-added services to make up for the shortfall.

China Telecom plans to triple the number of users for its fibre-optic broadband service this year to reach 30 million. The company further aims to grow the user base to 100 million by the end of China's twelfth Five-Year Plan (2011-2015).

China Telecom plans to cover every city in China with fiber broadband service in three years and convert all copper lines to fiber, the China Daily reported in February. Under the Five-Year Plan, the Chinese government will focus on developing the telecommunications infrastructure with total investments reaching CNY 2 trillion.

Broadband development will account for 80 percent. "Only 23 percent of Chinese families have internet access now, so China still has huge potential in this industry," said China Telecom chairman Wang Xiaochu.

The company will follow the government's policies to improve infrastructure and cooperate with local authorities to integrate telecommunications, television, and internet networks. China Telecom further plans to introduce cloud computing and 'internet of things' services, more internet applications for mobile and fixed internet users, and to accelerate its transformation into a comprehensive telecommunications provider.

Last week China Telecom announced a FY2010 net profit of Rmb 15.8 billion (+9% year-on-year).

Mobile ARPU continued to decline, with Q4 2010 declined by 18% year-on-year and 9% quarter-on-quarter.

Management indicated that the decline in CDMA ARPU is attributable to more aggressive voice subsidies to retain subscribers and maintain growth momentum (Chart 1). There is no ARPU guidance for 2011.

China Telecom’s Declining Mobile ARPU Trend

Source: Company data, Morgan Stanley Research
In FY2010, the handset subsidies and marketing costs from mobile revenue were 25% and 38%, respectively. Management expects that the subsidy as a percentage of mobile revenue will decline to below 25% in the coming year.
The fixed-line revenue declined by 4% year-on-year in FY2010. It comes as no surprise that management expects the fixed-line revenue to continue to decline, due to the fixed-mobile usage substitution. The management guided that the decline in FY2011 should be less than 4% due to higher contributions from the broadband internet business and value-added service. The trend of fixed-line revenue is important to China Telecom, as it accounts for a significant portion of the revenue (75% in FY2010).
The risk of China Telecom is that the pricing pressure in the mobile segment could continue, given the continued decline of the APRU trend (Chart 1). Although there is a sign of improvement on the CDMA subscriptions, the revenue is more or less offset by the decline in fixed lines.
Despite the mentioned risk there are positive catalysts that could drive the share price higher:
  1. Stronger-than-expected mobile subscribers
  2. An early and successful launch of CDMA iPhone
  3. A big international acquisition
Also the fact that they plan to triple the number of users for its fiber-optic broadband service this year makes the stock an attractive buy for the longer run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.