China Telecom's net profit rose about 10% year-over-year (y-o-y) to RMB 16.2 billion ($2.64 billion) in the nine month period ending September 2014, driven by growing 3G-4G and fixed-line broadband subscribers and significant cost savings. These cost savings were largely on account of a double-digit decline in handset subsidies as well as a favorable revision of interconnection fees by the government last year. The carrier’s operating revenues grew 2.2% y-o-y to about RMB 244 billion ($39.8 billion) on account of increasing 3G service revenues and consistent growth in fixed broadband. Revenues from 3G service increased, as the carrier added over 16 million new 3G users in the preceding one year period, taking its total 3G subscriber base to about 113 million by the end of September. However, the company’s lackluster performance in terms of subscriber adds in the first nine months this year was reflected in its mobile terminal sales, which declined 17% y-o-y to RMB 23.3 billion ($3.8 billion).
On the cost side, expenses incurred on the maintenance of network operations increased by 24.4% over the same period last year on account of the company’s efforts in improving its wireless network quality. Depreciation and amortization (D&A) was down about 5% owing to the completion of the acquisition of CDMA assets by the carrier from its parent company. The customer relationships acquired by China Telecom as part of the deal were fully amortized by December 2013, which led to amortization savings in the first three quarters of this year. The company also gained from the favorable revision in network interconnection fees by the government last year (effective from January 1, 2014) which helped reduce mobile interconnection costs and improve profitability.
The carrier received a license towards the end of the second quarter to commence its FDD-LTE and TD-LTE 4G hybrid network trial, which now extends to 40 cities in the country. Developing a 4G network has already started helping the carrier gain wireless subscribers, and we expect this to help further improve the carrier’s monthly subscriber additions as well as average revenue per user going forward. We currently have a price estimate of $52 for China Telecom, implying a slight discount to the market price.
See our complete analysis of China Telecom here
Competition Impacts Wireless Subscriber Adds, ARPU Stable
China Telecom has been quick to capitalize on 3G demand and boasts of industry-leading 3G penetration of about 62%. In comparison, market leader China Mobile and second-placed China Unicom have 3G-4G mixes of 36% and 49%, respectively. Despite its already high 3G penetration compared to rivals, China Telecom was able to add around 16 million 3G subscribers in the one year period prior to September 30. However, its net 3G additions in the first nine months this year were only 9.4 million, about one-third of the figure reported in the same period last year. This was a result of China Mobile’s aggressive expansion in 3G and 4G, and China Unicom making steady progress with its 4G, 3G HSPA+ and high speed 42M (“3.5G”) networks.
A positive development for the carrier was that its mobile ARPU was stable around its 2013 level of RMB 55 ($9), unlike other Chinese carriers, who are witnessing declining average monthly revenues per user this year. Since China Telecom only launched its 4G handset service in July, its impact on the company’s Q3 earnings was minimal. However, we expect the carrier to do well on this front going forward considering that it gained more high speed (3G and 4G) subscribers in three months following the launch of 4G services (5.27 million) than it did in the first six months of this year (4.13 million). However, we also expect market competition to remain a drag on the company’s margins in the next few quarters.
Fixed Line Broadband Subscriber Base Reports Steady Gains
China Telecom's fixed line broadband subscriber adds offset most of the decline in local access line subscribers (land-line telephones). The company added 5.6 million fixed line broadband subscribers in the first three quarters of 2014 as the carrier continued to bolster its Fiber-To-The-Home penetration. The carrier’s strategy was consistent with the government’s ‘Broadband China’ plan to universalize broadband Internet in the country. With a market share of about 53%, China Telecom has about 106 million fixed line broadband subscribers, of which about 34 million are on the faster FTTH network.
China Telecom’s broadband business holds a lot of potential, as China’s broadband penetration presently is only around 40%. Moreover, the carrier might offer higher value services such as IPTV and Video-On-Demand to a majority of its customers going forward, which could potentially increase its broadband ARPU.
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