China Telecom

The last major development in the Telecommunication Industry in China was in 2008, when China Unicom bought over China Netcom, with China Unicom’s CDMA unit heading over towards China Telecom. This gave China Unicom access to the Fixed Line market, as well as the broadband market, while China Telecom gained access to the mobile market. Most of China Netcom’s fixed line business is in the North of the country, while China Telecom’s fixed line business is in the South. By diversifying into the mobile sector, China Telecom is able to further increase its revenue. China Telecom’s network operates on a CDMA, while the China Mobile and China Unicom operate on a GSM network. The difference will be explained in the next section.

China Mobile also has access to the internet sector, despite it not having a market share in the fixed line sector. It gained this access via its acquisition of China Tietong in 2008.

Difference between CDMA and GSM

CDMA and GSM are essentially the same thing, with CDMA’s 3G network boasts speeds between 300kbps to 700kbps, while GSM’s 3G network speeds are between 275kbps and 380kbps. The SIM card that we have all come to learn to love is used for GSM phones, while their equivalent for CDMA phones are R-UIM cards. This however, is not available on all carriers, with some carriers linking the number to a phone, meaning that when changing phones, the old phones must be deactivated for the new one to be activated.

The weakness of CDMA is that it is not as good in rural areas, and the charge is significantly higher should they wish to contract GSM cells to provide roaming services for them.

The above information is taken from Wisegeek. Please visit their site for more information on the differences.

Narrowing Down to 2 Carriers

China Mobile’s business model is heavily dependent on their mobile income, and China has a history of breaking up large companies in order to increase competitiveness. As such, any intervention by the Chinese government would most likely be detrimental to China Mobile, considering that the fixed line and internet sector is evenly distributed as compared to the mobile sector.

Analysis

Performance wise, for year ended 2008, China Mobile’s has a profit margin of 29% and an EBITDA margin of 57%. On the other hand, the profit margin for China Unicom was 4% and EBITDA margin of 39%. China Telecom had the worst performance among the 3, with a profit margin of 1% and an EBITDA margin of 32%. EBITDA would have increased to 47% and 45% for China Unicom and China Telecom respectively if impairment cost was taken out of consideration.

There was no breakdown provided into segments for China Mobile, but for China Unicom, their GSM revenue contributed to 43% of total sales while fixed line was 55% of total sales. China Telecom had a total of 52% of sales contributed by fixed lines, 2% contributed my mobiles and 22% contributed by the internet.

For 1H2009, for China Telecom, the YOY operating profit decreased by 24%, while YOY profit for the period decreased by 29%. The decrease is attributed to higher operating expenses. Operating Revenue increased by 13 billion RMB, an approximate increase of 14%. Mobile Voice services accounted for 8.7% of operating revenue, with Wireline Voice and Internet Services accounted for 39.8% and 23.7% of total revenue respectively. There was a decrease in the revenue of Wireline services from 50,485million RMB to 41,060million RMB for 1H2009.

For 1H2009, for China Unicom, the YOY profit decreased by 41%. Although Expenses were approximately the same as 1H2008, the Operating Revenue decreased by 7%, resulting in the large decrease in YOY profit. 44.8% of operating revenue was attributed to GSM revenue, while 52.6% was attributed to fixed lines. There was an increase of 1.84billion RMB in GSM revenue, while a decrease of 5.138billion in fixed lines.

Projected P/E for 2009
China Telecom – 13.2
China Unicom – 16.1
China Mobile – 11.6

I believe that China Telecom’s ability to increase operating revenue is a key performance indicator for me. Furthermore, as a market leader in the South for fixed lines, as well as being one of the market leaders for Internet services, it will gain a steady stream of income. I believe that China Telecom’s Mobile sector will provide an increasing percentage of its operating revenue. China Unicom’s decrease in operating revenue is a cause of worry, mainly because after selling off the CDMA network to China Telecom, it has another competitor in the Mobile sector, while gaining control of the less lucrative North in fixed lines would mean that its growth would have been reduced.

*Disclaimer: I am vested