China Telecom Earnings: Solid Growth Again but Valuation Reduced on Weaker Currency

China Telecom’s 00728 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.

We make only small changes to our forecasts and reduce our fair value estimate for China Telecom to HKD 5.00 per share from HKD 5.20 per share, mainly on a weaker Chinese yuan. Our no-moat rating for China Telecom is 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. At current prices China Telecom is 4-star-rated, and we prefer China Unicom over China Mobile and then China Telecom.