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Chinese Telcom Thriving Despite Stock Market Downturn
Aspire, Thought Leaders | 27 August 2015
By: Louis Wong
Articles (12) Profile

During the recent selloff in the China and Hong Kong stock markets, Chinese telcom operators have shown resilience and have outperformed the broad market. For instance, the share price of China Telecom (0728.HK) remains almost unchanged month-to-date while China Mobile (0941.HK) and China Unicom (0762.HK) are down 8.7 percent and 5.1 percent respectively, while the blue-chip Hang Seng Index has plummeted 13.1 percent.

Growth in Earnings and Increasing 4G Subscribers

The resilience of Chinese telcom stocks is mainly attributable to better-than-expected interim results and merger speculation. China Mobile’s operating revenue grew 4.9 percent over the same period last year and reached RMB 340.7 billion.  Although revenue from telecommunications services has only risen slightly by 0.5 percent to RMB 299.5 billion, its data business revenue surged 24.3 percent to RMB151.5 billion, accounting for 50.6 percent of revenue from telecommunications services.

The robust growth in data business revenue is driven by the rapid development of 4G business. In the first half of 2015, China Mobile has achieved the world’s largest 4G network covering a population of more than one billion people, with the number of 4G base stations reaching 940,000.

In addition to striving to increase revenue, the Group further reinforced cost reduction and efficiency enhancement, adjusted its marketing and sales model, and stringently controlled administrative expenses. It has reduced subsidies for smartphone buyers.  Instead, it created its own branded smartphones priced at around RMB 1000, which helped speed up client acquisition. As of end of June 2015, its 4G customer base has reached 190 million, accounting for 23 percent of its 810 million customers.

Although net profit attributable to shareholders was down by 0.8 percent to RMB57.3 billion, it topped market expectation of RMB55.1 billion. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) was RMB 126.9 million, up by 7.3 percent.China Telecom also recorded strong growth in data business revenue. Mobile handset internet access revenues amounted to RMB 22.5 billion in the first half of 2015, representing an increase of 43 percent over the same period last year.

It gained 22 million more 4G subscribers, with its number of 4G users reaching a total of 29 million, accounting for about 15.2 percent of its 191 million mobile subscribers. Its operating revenues amounted to RMB 164.9 billion, remaining stable as compared with the same period last year. Net profit attributable to shareholders was RMB 10.9 billion, which was a decline of 4 percent over the same period last year, but matched market expectation. EBITDA was RMB 50.7 billion, up by 0.4 percent.

As for China Unicom, its revenue decreased by 3.3 percent to RMB144.6 billion in the first half of 2015, as compared to the same period last year. Yet, net profit attributable to shareholders increased by 4.5 percent to RMB 6.99 billion. EBITDA was RMB 50.4 billion, up by 5.8 percent. The number of its mobile broadband subscribers increased by 8.68 million to 157.79 million, accounting for 54.5 percent of its 289.3 million mobile subscribers.

Speculation of Merger—Charming but Unlikely

Apart from satisfactory results, speculation of merger between China Telecom and China Unicom has lent support to their share prices. In response to the speculation, a China Telecom spokesman said he was not aware of such a merger plan, while China’s Unicom’s spokesman declined to comment. As China is stepping up efforts to push its telecom operators to become more efficient, free-market competitors, it is highly unlikely that such a merger will materialise.

But on the other hand, China Mobile is considering a potential acquisition of the assets and businesses of China TieTong Telecommunications Corporation, a wholly owned subsidiary of its ultimate controlling shareholder, and the third largest fixed-line internet services provider in China after China Telecom and China Unicom. The acquisition will enable China Mobile to obtain quick access to fixed-line broadband core resource and strengthen its full-service strategic development.

Louis is one of the most experienced fund managers in Hong Kong and has more than 25 years of solid experience in the financial markets. He employs a strict criteria for choosing his stocks, which is deeply insistent on having a thoughtful and sophisticated analysis of the company before making any investment decision.

Please click here for more information about this author.


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