Thursday, 19 March 2015

China Telecom - same issues as other telecoms companies but bigger opportunities

Is it really nearly 18 months since I last wrote about China Telecom?  Back then I described the company as 'probably the best balanced Chinese telecom company' given its strong combination of fixed and mobile interests (including in the former a very strong positioning in broadband and related). The last three years have ultimately seen an upward share price...although there has been material volatility too - particularly a year ago.

So why the volatility...but ultimately upward share price move?  Well China Telecom are facing many similar pressures to other telecoms companies around the world including (positively) huge data and related growth...

...a rising 4G mix BUT falling/under pressure mobile ARPU...

...and rising (4G influenced) mobile capex (30%+ increase!)
And then put all of this together with (as noted below) VAT reform...

...which helped suppress shorter-term headline numbers: 

The reality is that China Telecom should not be valued as a low/no growth entity given these monetisation trends in China (data, 4G, fixed-to-mobile substitution etc.) are ultimately very material in size. In Europe/the US this typically would be around a minimum of a x6 EV/ebitda multiple.  China Telecom today trades at a little over x4.  Admittedly there is the large state ownership, rising alternative competition (MVNOs) and a capex bump which ceteris paribus will hit profitability but bigger picture this seems a little rude...especially with a corporate net debt level at around x0.9 of ebitda and a free cash flow yield of around 4% (with a dividend yield of just under 2% therefore fine to finance).  I could certainly envisage a HK$6 share price target (around x5 forward EV/ebitda) and believe buying sub a HK$5 share price and each 50c below this level makes sense.

These are the levels I am going to write down.

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