China Telecom set to cash in on mobile data and internet tech, analysts say

The country’s largest fixed-line telecom operator China Telecom is set to rake in profits over the next year on mobile data usage and emerging internet technology, analysts say.

The state-owned company is betting on 4G cellular networks to continue driving growth, as it sees average data consumption doubling and average revenue per user for 4G networks increasing by 15 to 30 per cent so far this year, according to a report from broker Kim Eng Securities.

“Management [has] remained bullish on overall subscriber growth, especially on 4G,” Kim Eng analysts Mitchell Kim and Jeffrey Kwong said.

China has worked in recent years to improve mobile and fixed-line broadband infrastructure across the country, and this appears to have paid off for China Telecom, which grew internet access revenue by 3.3 per cent in the first half. Total subscribers rose to 118 million as of end June, compared to 109.6 million a year earlier, Macquarie Research said.

This growth comes as China has begun conducting trials of so-called high-speed 5G broadband mobile equipment across 100 cities, amid global industry discussions for a single 5G standard.

While Kim and Kwong say the country’s state-owned telecom operators China Telecom, China Mobile, and China Unicom, are still at peak 4G investment and won’t invest in 5G until a standard is set, which could happen as early as 2019.

In addition to mobile networks, China Telecom is investing in five areas of emerging tech for revenue growth: Cloud and big data, high-definition internet surfing, mobile payment service Bestpay, the connectivity of smart devices, and Internet+, or industrial applications of the web.

“China Telecom is making the right effort to grow its revenue,” Macquarie analysts Danny Chu and Nathan Ramier said. “We believe the company hits the right track.”

In particular, China Telecom is seeing “promising” revenue growth potential from its Internet Data Centres (IDC), or data storage facilities, with revenue in the first half increasing 34 per cent from a year earlier to 7.8 billion yuan, according to Chu and Ramier.

China Telecom currently operates around 400 IDC sites, representing 70 per cent of data from the big three Chinese tech conglomerates – Baidu, Alibaba, and Tencent.

Another “critical component” of China Telecom’s strategy is its Internet Protocol television (IPTV), which offers high-quality and high-speed live streaming TV. The operator has 47 per cent of the video market share in Sichuan province, for instance, largely by bundling the IPTV service within larger broadband packages.

“Sichuan IPTV is hot and sticky,” Kim and Kwong said. “China Telecom appears to be well positioned.”

While revenue growth for both IDC and IPTV is still small, Kim and Kwong say that “sometimes small can be beautiful, their growth is accelerating”.

“At present, China Telecom believes it has ‘the best platform’ for IDCs, capturing 59 per cent of the market compared to China Telecom and Unicom, and 37 per cent of the market share for all IDC service providers,” the Kim Eng report said.

Investors have been watching China Telecom after a series of top-level leadership changes, with company chairman Yang Jie replacing Chang Xiaobing, who is now facing prosecution for corruption after being detained last December.

Chang, also the former chairman and chief executive of rival China Unicom, had only been with China Telecom for a few months since swapping jobs with Wang Xiaochu, then-chairman of China Telecom, in August last year.

Chu and Ramier said that China Telecom’s senior management needs to introduce new business initiatives to drive further growth and reassure investors “the company has not lost its momentum despite its former chairman [Wang] joining a rival company.”

Analysts believe China Telecom will increase in value in the next twelve months, with Macquarie valuing the company’s shares at HK$4.5 and Kim Eng assigning a target price of HK$5.06. The company’s stock closed at HK$4.06 on Thursday.