Monday, September 11, 2017

China Telecom is growing but ARPU continues to erode

For the first half of 2017, China Telecom posted total revenue of RMB 184.1 billion, up 4.1% from RMB 176.8 billion a year ago – a faster pace of growth than many other global carriers, but likely slower than China’s overall GDP. While revenue for mobile and wireline services grew a faster pace than the global average, China Telecom’s net profit expanded at an even better pace – up 7.4% yoy to RMB 12.5 billion.

This positive news from China Telecom came about one week after China Unicom finalized a US$11.7 billion investment round with Alibaba, Tencent and nine other leading Chinese companies.  With the Chinese market currently in contention by three rivals (China Mobile, China Telecom and China Unicom), the strategic investment, with the backing of the central government, has the potential to tip the scale in favour or China Unicom.  The cash infusion strengthens the balance sheet and provides the opportunity to leap ahead in network rollout and 5G prepositioning. For comparison, China Telecom’s company-wide CAPEX for the first half of 2017 amounted to RMB 41 billion (US$6.20 billion approximately) and is expected to reach RMB 89 billion for 2017. down 8% compared to 2016. While China Telecom is cutting network expenditures, China Unicom may get a much-needed boost to advance its infrastructure.


China Telecom’s recent past

China Telecom is the original incumbent fixed line operator for China. Until 1995, it was purely a government agency under China’s Ministry of Posts and Telecommunications. In 2002, a historic split took place with some of the provincial and city assets being assigned to the newly-created China Unicom, and some being retained by the newly listed China Telecom Corporation Limited. China Telecom made its entrance into mobile communications by pursuing a personal handy phone network technology, before eventually adopting CDMA 2000 and then in 2015, finally launching 4G LTE for its mobile backbone.

Today’s mission

For its part, China Telecom says its mission is to build “three superior networks, namely 4G network, IoT network and all-fibre network with further reinforcement of network edges.” As the legacy operator for much of the country, China Telecom suffers from the same, steady loss of fixed access line.  In its case, fixed lines have fallen from 137 million two years ago to about 124 million now. However, over the same two-year period, the number of FTTH subscribers has nearly doubled, from 61.92 million in mid-2015 to about 117 million today.  Sometime before the end of this year, China Telecom will have tipped the scales from the past to the future, as the number of FTTH subscribers zooms past legacy copper fixed access.

The big trends for 1H2017

  • Service revenues amounted to RMB165.8 billion, representing an increase of 6.8% over the same period last year
  • EBITDA was RMB52.4 billion, representing an increase of 3.7% over the same period last year while EBITDA margin5 was 31.6%.
  • Net profit was RMB12.5 billion, representing an increase of 7.4% over the same period last year.
  • Capital expenditure was RMB41.1 billion while free cash flow was RMB7.2 billion with remarkable improvement over last year.
  • The net increase of mobile subscribers was 14.85 million, reaching a total of 230 million
  • China Telecom now estimates its national mobile market share at 16.8%.
  • The net increase of 4G users was 30.15 million, reaching a total of 152 million.  This means China Telecom’s penetration rate of 4G users increased has reached 66%.
  • The aggregate handset Internet data traffic increased by 126% compared to the same period last year while the DOU of 4G users reached 1.4GB, representing an increase of 56% over the same period last year.
  • An additional issue is the vast ARPU disparity between China Telecom (along with its home market rivals) with developed markets in the West. The average 4G user in China pays roughly US$11 per month, while users in the United States or Western Europe might pay 4X, 5X or 6X this amount.  The disparity roughly follows per capita GDP differences between the country. However, much of the capital expenditure, at least for network infrastructure, will be closer. 

Usage continues to grow

China Telecom is also reporting one mobile usage trend that may not be common with most other mobile operators – mobile voice usage continues to rise even as handset data traffic screams ahead.  In Q2 2017, China Telecom’s handset data traffic (kTB) reached 633.6 kTB up from 491.6 kTB in Q1.  Meanwhile, mobile voice usage reached 196,735 million minutes in Q2 2017, up from 179,556 million minutes in Q1.  People are talking more even as they become increasing depended on their smartphones.
The net increase of wireline broadband subscribers was 4.98 million, reaching a total of 128 million.
The net increase of FTTH subscribers was 11.24 million, reaching a total of 117 million while the penetration rate reached 92%.

The ARPU quandary

While other carriers have seen a big pop in average revenue per subscriber (ARPU) in the transition from 2G/3G to 4G, the gain at China Telecom is from RMB 56.8 (US$8.55) to RMB 67.2 (US$10.12) As noted above, the migration of the subscriber base to 4G is now 66% complete, so revenue will continue to grow as the remain 34% upgrade their smartphones and move onto a 4G data plan. However, China Telecom’s 4G ARPU is also falling, down 7.7% from RMB 72.8 (US$10.96) in 2016 to RMB 67.2 (US$10.12) today. The rate of decrease in ARPU is greater than the growth in overall revenue. If the recent past is any guide, it’s unlikely that China Telecom will be able to increase 4G prices anytime soon.  With growing competition, ARPU probably will continue to slide.

An additional issue is the vast ARPU disparity between China Telecom (along with its home market rivals) with developed markets in the West. The average 4G user in China pays roughly US$11 per month, while users in the United States or Western Europe might pay 4X, 5X or 6X this amount.  The disparity roughly follows per capita GDP differences between the country. However, much of the capital expenditure, at least for network infrastructure, will be closer.

Usage continues to grow

China Telecom is also reporting one mobile usage trend that may not be common with most other mobile operators – mobile voice usage continues to rise even as handset data traffic screams ahead.  In Q2 2017, China Telecom’s handset data traffic (kTB) reached 633.6 kTB up from 491.6 kTB in Q1.  Meanwhile, mobile voice usage reached 196,735 million minutes in Q2 2017, up from 179,556 million minutes in Q1.  People are talking more even as they become increasing depended on their smartphones.

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