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SCMP Reporter

Connection and user growth should give the firm a significant boost

Robust growth in broadband Internet connections and xiaolingtong users should help China Telecom Corp deliver better than expected half-year results on Wednesday.

However, the key questions are how much is it costing the fixed-line carrier to acquire new users and how long can its growth trend last?

Analysts are concerned that China Telecom has been subsidising handsets for the xiaolingtong  service - a wireless local loop that offers limited mobile phone services at low cost - to achieve strong subscriber growth. This was the marketing strategy used by China Unicom for its code division multiple access (CDMA) business and it has hurt profitability.

Major xiaolingtong  equipment supplier UTStarcom has announced multimillion-unit contracts from China Telecom, including contracts for delivery of xiaolingtong  handsets.

However, China Telecom has never disclosed how its handset costs would be paid for.

Analysts and investors are also looking for guidance on the company's pending acquisition of new assets from its parent and its third-generation mobile business plan. All are factors affecting China Telecom's earnings performance.

Analysts estimate China Telecom added about five million to 5.5 million new users in the first half to an established customer base of 56.86 million. Among the new users, 30 per cent to 40 per cent were expected to stem from xiaolingtong  services.

Market watchers are expecting China Telecom's broadband customer base to at least double from last year's 1.23 million users in four provinces, largely driven by strong second-quarter demand for high-speed Internet access. Analysts forecast China Telecom's first-half profit to range between 8.9 billion yuan (HK$8.34 billion) and 9.47 billion yuan, representing year-on-year growth of 5 per cent to 11.7 per cent.

In the first half of last year, China Telecom recorded net profit of 8.48 billion yuan.

Excluding the amortisation of upfront connection fees, the recurrent net profit for the half is expected to range from 6.08 billion to 6.6 billion yuan, compared with 5.43 billion yuan in the first six months of last year.

Analysts also project China Telecom's first-half recurrent revenue growth at between 1.6 per cent and 12.3 per cent from last year's 33.81 billion yuan.

However, market watchers are more concerned about whether such momentum will continue in the second half of the year, and have divided views on the fixed-line giant's year-end prospects.

Bullish observers, such as UBS and BOCI, believe the fast take-up in xiaolingtong  and broadband services that China Telecom is likely to register in the first half will continue during the second half.

UBS expects UTStarcom's launch of its US$100 colour screen xiaolingtong  handsets and dual-mode handsets next month will further boost the uptake of xiaolingtong.

The brokerage also believes China Telecom's pending acquisitions will enhance the carrier's future earnings.



China Telecom result seen as strong