China Telecom Earnings: Another Solid Result; Shares Still Undervalued

China Telecom’s 00728 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.