China Telecom profit falls, but shares rise on network deal

Fixed-line operator aims to further expand 3G mobile base through purchase of parent's wireless set-up despite a profit fall of 8.3pc

PUBLISHED : Thursday, 23 August, 2012, 12:00am
UPDATED : Thursday, 23 August, 2012, 2:13am

China Telecom, the world's largest fixed-line network operator, plans to step up the expansion of its 3G mobile user base after landing a deal to buy the wireless network of its parent company.

Chairman and chief executive Wang Xiaochu said the Hong Kong-listed carrier, which posted yesterday a drop in interim net profit, agreed to pay 84.6 billion yuan (about HK$103.7 billion) in cash to acquire the domestic mobile network it is now leasing from state-owned parent China Telecommunications Corp.

The acquisition is slated to close at the end of this year. It comprises a nationwide mobile infrastructure that supports the 2G cdmaOne and 3G CDMA2000 mobile standards.

"That is 19 per cent below our purchase price assumption of 104 billion yuan and 30 per cent lower than the asset's 120 billion yuan book value at the end of last year," said Lisa Soh, an analyst at Macquarie Capital Securities. Wang described the deal as "timely" and made "at a fair and reasonable price".

Operating the smallest of the mainland's three nationwide wireless networks, China Telecom has discussed plans to acquire its parent's mobile infrastructure since March last year. The deal would allow the carrier to boost operating efficiency and cut expenses by avoiding the escalating costs of leasing the network.

The price of China Telecom's shares rose 4.51 per cent to close at HK$4.17 each yesterday on news of the transaction.

That may have lessened the sting of a disappointing 8.3 per cent fall in first-half net profit to 8.8 billion yuan, down from a revised 9.6 billion yuan a year earlier, mainly due to intense market competition, higher operating expenditures and increased marketing costs.

Wang said China Telecom's introduction of Apple's iPhone to its network in March "required an appropriate increase in marketing initiatives" this year that would pressure profitability in the near term. But he expected the iPhone to help the company draw more high-end users, which would "enhance long-term sustainable growth".

Citing confidentiality agreements with Apple, Wang declined to say how many iPhone users were now with China Telecom and how much subsidy it provided for that smartphone.

First-half revenue climbed 14.8 per cent to a record 138 billion yuan, up from 120.2 billion yuan the previous year, as it added more 3G subscribers and mobile data usage grew.

China Telecom, which became Apple's second mainland carrier-partner after China Unicom, reported 144.18 million total mobile subscribers at the end of June, including 50.96 million 3G network users.

As more users accessed the internet through their 3G smartphones, China Telecom's first-half mobile data revenue rose 46.7 per cent to 19.3 billion yuan from 13.1 billion yuan a year ago.

Wang noted there was an "accelerated migration trend" by domestic 2G users to 3G networks in the first half. "Approximately 900 million 2G service users nationwide are potential 3G users of the company," he said.

Macquarie's Soh, however, said the plan to scale up the carrier's 3G business "seems to suggest that [domestic] competition will not ease in the second half", which will "put more pressure on China Telecom's declining profitability this year".