China Telecom Expects Continued Strong Growth in Cloud Services Revenue

China Telecom’s 00728 2022 was highlighted by continued exceptional growth in cloud services revenue (which the company expects to continue in 2023) and a focus on industrial digitization. This drove 2022 services revenue growth of 8%, but with some margin contraction with EBITDA growing 3.4% and underlying earnings per share growing 3.8%. For traditional telecom services products, we estimate that 8% services revenue growth would likely drive over 20% earnings growth. The lower-margin industrial internet services are likely contributing to the lower consolidated margins. Fourth-quarter services revenue growth of 7.9% year on year was broadly in line with the full year, but industrial digitization grew 19% year on year in the fourth quarter with wireline and smart family growing 3.8% year on year and mobile service revenue declining 2.2% year on year.

We retain our fair value estimate for China Telecom of HKD 5.20 per share. Our no-moat rating for China Telecom is also retained, which stems from its returns remaining below weighted average cost of capital. Its returns have remained below WACC for each of the past 10 years and we expect this to be the case in our forecast period despite our expectation that returns will improve. We forecast operating income to grow at an average of 7.9% per year over the next five years due to increased returns from the high investment in 5G network buildout over the past three years and expected margin improvement from industrial digitization as scale increases.