Company Reports

China Telecom’s first-quarter 2024 results were broadly in line with our expectations and China Unicom’s first quarter but were better than China Mobile’s first quarter. China Telecom reported first-quarter services revenue growth of 5.0% compared with China Mobile’s 4.5% and China Unicom’s 3.4%. China Telecom’s first-quarter EBITDA growth was 3.6% compared with 3.4% for China Unicom and a 2.3% decline for China Mobile. China Telecom's net profit growth was 7.7% compared with China Unicom’s 8.9% and China Mobile’s 5.5%, although China Mobile’s net profit after tax would have declined without reduced depreciation and amortization charges. China Telecom and China Mobile reported significant reductions in operating cash flow (28% for China Telecom and 24% for China Mobile), while China Unicom did not disclose first-quarter cash flow. We suspect this operating cash flow reduction is partly due to a mix shift toward corporate and government clients for IT services. Still, the recent economic conditions could also be affecting it.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 13 times to 408 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

China Telecom's fourth-quarter 2023 results were stronger than those of its peers, with 8.4% services revenue growth compared with 5% for the industry; 4.1% EBITDA growth compared with a 3.8% decline for the industry; and 9.7% net profit growth compared with flat for the industry. China Telecom’s higher services revenue growth seemed to allow it to better offset the higher bonuses than its competitors. Overall, we see it as a solid result, given concerns over China’s economic slowdown. China Telecom’s strength in fixed-line telecoms—based partly on its historical fixed-line monopoly over around two thirds of China—kept it in good stead as industry growth has pivoted away from mobile. Over the past three years, industry mobile services revenue growth has averaged just under 3% per year, but nonmobile services revenue growth has averaged 16% per year, driven by industrial digitization. China Telecom seems to have retained its lead in this space despite heavy investment from the larger China Mobile, but the gap seems to be narrowing.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 13 times to 406 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

China Telecom’s second-quarter 2023 result showed a continuation of the strong revenue and profit growth reported over the past two years. Second-quarter services revenue grew 5.5% with EBITDA up 5.3% and net profit up 12.4%, all year on year. Service revenue growth was a touch slower than 8% in 2022 and 7.7% in the first quarter, but EBITDA and profit growth were broadly in line. Growth in each of the key revenue lines slowed slightly with second-quarter mobile service as well as "wireline and smart family" revenue both growing 2.2%. Industrial digitization grew 14.6% year on year, which is a slight slowdown on 19% in 2022 and first-quarter 2023.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 13 times to 402 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

China Telecom’s second-quarter 2023 result showed a continuation of the strong revenue and profit growth reported over the past two years. Second-quarter services revenue grew 5.5% with EBITDA up 5.3% and net profit up 12.4%, all year-on-year. Service revenue growth was a touch slower than 2022’s 8% and first quarter’s 7.7%, but the EBITDA and profit growth were broadly in line. Growth in each of the key revenue lines slowed slightly with second-quarter mobile service revenue and wireline and smart family revenue both growing 2.2%. Industrial digitization grew 14.6% year on year which is a slight slowdown on the 19% in 2022 and first-quarter 2023.

China Telecom’s first quarter showed a continuation of the strong growth reported over the past two years, with industrial digitization driving revenue growth, but the traditional fixed and wireline revenue streams also holding up well. China Telecom’s services revenue grew 7.7%, with EBITDA up 4.7% and net profit up 10.5%, all year on year. In terms of growth, the result was broadly in line with its peers, with industry average year-on-year services revenue up 7.6%, EBITDA up 4.5% and net profit up 9.9%. China Telecom’s industrial digitization revenue increased 19%, compared with China Unicom’s 15% and China Mobile’s 24%. China Telecom’s mobile services revenue increased 3.2% compared with China Unicom’s 4.4%. We keep our fair value estimate for China Telecom at HKD 5.20 per share. Our no-moat rating for China Telecom is also retained, which stems from its returns remaining below the 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. This would be 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.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 13 times to 399 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

China Telecom’s 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.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 12 times to 391 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

We retain our no-moat ratings for both China Unicom and China Telecom, but we increase our fair value estimates for China Unicom to HKD 10.50 from HKD 9.70 per share previously and for China Telecom to HKD 5.20 from HKD 4.80 per share. This is due to a stronger Chinese yuan. We also retain our narrow moat rating for China Mobile and increase our fair value estimate to HKD 96.30 from HKD 90 per share, also due to a stronger Chinese yuan.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 12 times to 390 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

China Telecom’s third quarter showed some mild slowing from its recent high revenue growth. Continued high revenue growth in lower-margin industrial internet services also likely contributed to slightly lower consolidated margins. Third-quarter services revenue growth of 6.4% year on year was down from 8.8% in the first half while third-quarter EBITDA growth slowed to 2.0% from 5.2% in the first half. Third-quarter 2022 EBITDA margin of 28.5% fell 130 basis points from the same period in 2021. All revenue lines slowed in the third quarter, with growth still led by industrial digitization of 11.4% while wireline and smart family grew at 5% and mobile service revenue grew at 4.7%. We expect the economy may have had some impact on overall growth rates for China Telecom, as China Mobile’s service revenue growth also slowed mildly in the third quarter compared with its first half. Third-quarter net profit growth of 18.6% was largely due to reduced interest expenses as a result of the A share listing in 2021.

China Telecom benefited from the 2008 Chinese telecom reorganization and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, it has increased its wireless base more than 12 times to 390 million as it leveraged its strong fixed-line franchise. This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base.

In our view, no-moat China Telecom continues to be undervalued after reporting a strong first-half result with 8.8% services revenue growth year on year and 12% underlying net profit growth year on year. Second-quarter services revenue growth of 7.7% implied there was only a very mild slowdown in the second quarter with lockdowns and the economy slowing. In our view, the company is on track to hit its target of double-digit revenue and net profit growth for 2022 as outlined by management at the full-year result in mid-March. First-half revenue growth was driven by industrial digitization up 19% year on year and mobile revenue up 6% year on year. Mobile growth was driven by continued 5G customer growth with 44 million 5G package customers added over the quarter and 5G penetration reaching 60.3% of the total base.

China Telecom benefited from the 2008 Chinese telecom reorganization, and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, the firm has increased its wireless base more than 12 times to 372 million as it leveraged its strong fixed line franchise. This growth has enabled the business to become more profitable, as the network’s fixed costs are spread over a much larger customer base.

In our view, no-moat China Telecom continues to be undervalued after reporting another solid first-quarter result with 11.9% revenue growth year-on-year, 9.9% services revenue growth year on year and 12.1% net profit growth year on year. In our view this puts the company on track to hit its target of double-digit revenue and net profit growth as outlined by management at the full year result in mid-March. Revenue growth was again driven by industrial digitization up 23.2% year-on-year and mobile revenues up 5% year-on-year. Mobile growth was driven by continued 5G customer growth with a 23 million 5G package customers added over the quarter and 5G penetration reaching 55.5% of the total base. We retain our forecasts and our fair value estimate for China Telecom of HKD 5.00. Our no-moat rating for China Telecom is also retained, which stems from its returns remaining below WACC. 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 8.7% per year over the next five years so our fair value factors in a slowdown from the current strong growth, despite the prospect of increased returns from the high investment in 5G network buildout over the past three years and planned investment in industrial digitization over the next three to five years.

In our view, no-moat China Telecom continues to be undervalued after reporting another strong result for 2021 with 7.8% services revenue growth and 19.2% earnings per share growth. The company is targeting double-digit revenue and net profit growth in 2022 and we don’t believe the Chinese telcos are known for setting themselves overly demanding targets. Cash flows were also strong with operating cash flows up 4% and free cash flow up 27% to CNY 57 billion. These strong cash flows, combined with the CNY 48 billion received from the A-share listing sees China Telecom’s balance sheet with net cash balance of CNY 59 billion at the end of 2021 from a net debt level of CNY 20 billion at the end of 2020. This has allowed China Telecom to pursue a more aggressive approach to dividends with the dividend payout ratio for 2021 increased to 60% from the previous 40% with a target of hitting 70% three years after its A-share listing. The company will also declare an interim dividend for the first time in 2022. Despite this, the company has room for buybacks in our opinion, and we would not be surprised if it bought back some Hong Kong-listed shares given they trade at a around 40% discount to the A-shares.

China Telecom benefited from the 2008 Chinese telecom reorganization, and has made the most of the changes. With the reorganization, the firm received 29 million wireless subscribers from China Unicom. Since then, the firm has increased its wireless base more than 12 times to 372 million as it leveraged its strong fixed line franchise. This growth has enabled the business to become more profitable, as the network’s fixed costs are spread over a much larger customer base.