Where on the planet can one expect to find an increase of more than 20 million telephone connections in the space of two years. The answer is, of course, China. This spectacular growth underlines the success of China Telecom, the fastest growing fixed-line operator in the world. China Telecom has a great story to tell. As the mainland's largest fixed-line operator, it operates in an underdeveloped telecommunications landscape, where fixed-line penetration is only about 14 per cent. China Telecom is expected within a year to overtake the two fixed-line giants of the telecom world Japan's NTT and United States' Verizon. But the million dollar questions for investors are: will China Telecom be able to sustain its high growth momentum, and how well will it fare in a deregulated environment? In the first half of this year, China Telecom recorded a net addition of 4.8 million lines in the four provinces of Shanghai, Zhejiang, Jiangsu and Guangdong, adding to the total number of fixed lines under operation to 53.2 million. However, growth in the number of lines is expected to slow down to 3.9 million in the second half of this year, bringing the total lines addition for the full-year to 8.7 million, according to one of the underwriters, Morgan Stanley. While it is on target to register a 17 per cent growth this year, the growth momentum slowed after China Telecom acquired a huge subscriber base. The number of lines grew nearly 22 per cent in 2001, following growth of about 25 per cent in 2000, adding a total of 16.58 million lines in the period of 2000-1. Fixed-line business, which includes usage fee and monthly charge, has been a cash cow for China Telecom, contributing about 46 per cent of its revenue of 68.54 billion yuan (about HK$66.6 billion) in 2001. To maintain profitability in the wake of fixed-line market deregulation, China Telecom received a signal from the Ministry of Information Industry (MII) not to change tariffs of the local telephone service in the next three to five years. With China Netcom, China Unicom and Railcom entering the mainland's fixed-line market, there is concern that competition will affect the profitability and earnings growth of the fixed-line giant in the next few years. The bright side of the picture is that China still has a low telecom-density, averaging 14 per cent, which is far from the mature market measurement of more than 60 per cent. Even if it has a 22.1 per cent market penetration rate in the four provinces it operates in, there is still potential for growth. Morgan Stanley estimates that the fixed-line penetration rate in the China market could go up to 40 per cent in the next five to seven years. To sustain its top-line growth, China Telecom can acquire assets from its parent China Telecom Group, which had 70 million fixed-line users in 17 provinces. The listed vehicle is expected to acquire five coastal, and wealthy, provinces by early February 2003, following an acquisition mode similar to that used by its counterpart China Mobile over the past five years. One of China Telecom's most important assets is its last-mile control, making it a natural monopoly in the south and west of China. China Telecom virtually controls about 99 per cent of the local access market. The key direct-to-home-and-office connections will also help the company in moving into the data-centric service. It has invested in broadband Internet access and is the largest Internet service provider, surpassing 10 million dial-up subscribers as of the end of June, with nearly 80 per cent of users non-registered. The Internet service accounts for about 3.1 per cent of China Telecom turnover. The rising star in the business segment will be broadband, with users more than doubling to 662,900 as of the end of June, from 300,570 at the end of last December. The broadband penetration rate was less than half a percentage point, but analysts expect it to rise to nearly 2 per cent in 2004, assuming an average of more than one million net additions for the next two years. Morgan Stanley believes broadband users could top four million by 2004. Demand for faster connection speeds and wider bandwidth, coupled with the growing affluence of the Chinese population, fuelled growth in surfing the information superhighway. However, revenue growth in the Internet service segment in absolute terms will be limited by the shift to broadband from dial-up users because of potential cannibalisation and more competition from cable TV operators providing similar services. Morgan Stanley estimates that revenue from Internet services will jump 319 per cent to 6.85 billion yuan in 2004 from 2.14 billion yuan in 2001, making up 8.1 per cent of the estimated revenue in 2004. One business other than Internet access that stands to benefit from the data traffic growth will be the leased line and data centre service. China Telecom recorded 1.5 billion yuan, or 2.2 per cent of its revenue, from managing data service for large corporates, banks and government agencies. The company has been increasingly active in providing system integration and solution services. The 51-49 per cent held joint venture set up earlier this year with Hong Kong's dominant carrier, PCCW, to serve mainland financial enterprises is a step in this direction. Long-distance telephone services of China Telecom saw a declining revenue stream despite an increase in volume. Domestic long-distance calls accounted for 21 per cent of revenue last year, with international calls accounting for 5 per cent. Revenue from domestic long-distance fees fell 14.6 per cent to 14.67 billion yuan last year, while international fees fell 34.5 per cent to 3.39 billion yuan because China decided to slash costs to boost volume. Domestic long-distance traffic jumped 13.58 per cent to 30.63 billion minutes last year, although international traffic dipped a slight 0.7 per cent to 1.41 billion minutes. China Telecom is the mainland's largest player, controlling 99 per cent of the local fixed-line market, 64 per cent of IDD, and 60 per cent of Internet access. It could well be the best proxy to the growing traffic volume in the emerging economic power in the world.