COMPANY /INDUSTRY NEWS-INDUSTRY UPDATE:Telecom operators

Recap on results of three telecom operators. The three domestic telecom operators China Mobile [0941.HK], China Telecom [0728.HK] and China Unicom [0762.HK] have released their 1H15 interim results. Despite the tax impact of VAT reform introduced on June 2014, China Mobile’s 1H15 net profit was only down mildly by 0.8% YoY, while revenue grew by 4.9% YoY to RMB340.7bn. Driven by the rapid development of 4G business, data business continued to main-tain a positive growth momentum with revenue up by 24.3% YoY, and as a percentage of revenue from telecommunica-tions services rose to 50.6%. It is also considering potential acquisition of China TieTong to obtain quick access to fixed-line broadband core resources. China Telecom’s net earnings down around 4% YoY upon flattish operating revenue, while excluding tax impact of VAT reform, net profit grew around 11.3% YoY, mainly due to its fast data revenue growth through aggressive 4G rollout and higher wireline broadband speeds, coupled with control on operating cost base. Chi-na Unicom’s 1H15 net profit achieved 4.5% YoY growth despite 3.3% YoY drop in revenue, due to its strive to relieve the impact of VAT reform through transformation of its sales and marketing model and enhanced efficiency in managing its selling and marketing expenses.

    4G adoption is gaining fast momentum. Telecom operators continue to leverage their capabilities to expand 4G adop-tion and coverage. In 1H15, China Mobile’s 4G mobile data traffic increased to 62% of the total data traffic, with its 4G customers recording net increase of 99.6m to reach 189.7m, 23% of all users. The company has launched 4G interna-tional roaming services in 82 countries and regions and accelerated the global development of TD LTE through the ef-forts of GTI (Global TD-LTE Initiative). Recall that granting of 4G licenses early this year enables China Telecom and China Unicom to market and promote their 4G services more aggressively. China Unicom persisted in promoting sub-scriber migration to 4G, with penetration of 4G terminals up 8.3pp as of July 2015 compared to end-2014, representing ~73% of mobile users who can access to 4G network. In comparison, China Telecom has more financial capability to roll out 4G services. It has lifted 4G subscriptions to 15% of total users, with ~22m net addition of 4G terminal users in 1H15. Taking advantages of tower sharing, it rolled out 4G network fast and effectively to enhance time-to-market and savings in capex. The company aims to increase 330,000 4G base stations in 2015 (50,000 more vs. previous target).

    Tariff reduction still overhang the market. The regulator has set the target of speed enhancement and tariff reduction, which arose market concern on potential impact over ARPU. According to China Mobile, the company has achieved 31% mobile data unit price cut in 1H15, while it targets to cut it by at least 35% on a full year basis. China Telecom claimed that it has already cut average price for broadband access by 35% in 1H15, and planed to achieve government target of 30% mobile data unit price cut by end-2015. The company’s mobile ARPU down 2.5% YoY in 1H15, while management believe that mobile ARPU would continue to grow if there is no further stricter regulatory policy. China Uni-com said that the company already offer free recharge to upgrade the speed from 10 Mbps below to 10 Mbps. It actually achieved QoQ increase in mobile user ARPU coupled with YoY increase in fixed-line broadband ARPU, mainly due to its fiber optic upgrade and increasing subscriber migration to 4G that optimized the portfolio.

    Tower sharing helps saving in capex. Among RMB29.8bn capex spent by China Unicom in 1H15, RMB15.8bn went to mobile broadband network, while TowerCo actually helped to build 100,000 base stations, saving ~RMB9bn, accord-ing to the management. For the whole year, the company expected capex could be RMB10bn more than budgeted. Chi-na Telecom maintained its 2015E capex budget of RMB107.8bn, while 4G capex would be RMB6bn lower than budget, due to tower investment saving plus strengthened centralized procurement. China Mobile’s full year capex plan re-mained at RMB199.7bn, while it spent ~RMB69.7bn in 1H15, among which RMB33.7bn went to 4G.