China Telecom is the country’s largest fixedline operator, and also the second-largest mobile operator after China Mobile. China Telecom’s mobile user base has surged 13 times since 2008 to reach around 400 million.
Besides 104 million fixed-line users, it has 184 million broadband subscribers too, giving it a bigger, multiproduct platform and addressable market to cross-sell its products and services. “This growth has enabled the business to become more profitable as the network’s fixed costs are spread over a much larger customer base,” says Morningstar analyst Dan Baker, who likes the company for having made the most of favourable structural changes in the industry.
Besides a strong hold on the consumer market, China Telecom is capturing new growth in the enterprise market. Specifically, it is providing industrial digitisation services, such as internet data centres and cloud computing. Its internet data centre business, for example, is the largest in China, notes Baker. In addition, the company has an extensive overseas presence in 41 countries and regions, running 47 submarine cables and other related communications infrastructure.
For its FY2022 ended December 2022, the company’s earnings increased by 12.5% y-o-y to RMB27.6 billion ($5.2 billion), on the back of an overall operating revenue of RMB481.4 billion, up 9.5% over preceding FY2021.
What makes China Telecom interesting is the prospect of significant growth ahead in its industrial digitalisation services, with a revenue growth guidance of 20% to 22% y-o-y over three years.
For FY2022, revenue from industrial digitalisation was already up 19.7% to RMB117.8 billion, contributing 27.1% of total service revenue, up by 2.5 percentage points. In three years’ time, this proportion is seen to reach 35%.
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Even for its mobile segment, China Telecom has managed to eke out higher revenue despite the obvious high level of maturity. For FY2022, its average revenue per user increased by 0.4% y-o-y to RMB45.2, driven by higher take-up of more expensive 5G plans to around 69%. DBS expects this proportion to further increase to 79% in the current financial year, leading to a 3% lift in mobile service revenue.
China Telecom is trying to be friendly to shareholders too by paying dividends with a yield of around 7%. This is equivalent to a payout ratio of 65% for FY2022, up from 60% in FY2021. The company has reiterated its commitment to pay at least 70% of its earnings for FY2023.
With the congruence of these positive factors, DBS has lifted its earnings estimates by 4% for FY2023 and 9% for FY2024 on higher revenue earnings projections. DBS now expects China Telecom to report earnings growth of 12.5% for FY2023, 15% for FY2024 and 18.2% for FY2025. DBS’s new target price of HK$5.90 ($1.02), from HK$4.50 previously, is pegged to 15x FY23 earnings, up from an earlier multiple of 12x given the faster growth seen.
Based on our in-house valuation, we think China Telecom’s intrinsic value is around HK$4.69, around 20% above its current trading price of HK$3.82.
