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China Telecom Sees Profit Slide As Mobile Bites

Posted on: Thursday, 31 August 2006, 06:00 CDT

China Telecom Corp Ltd, the largest fixed-line operator in mainland China, has posted a fall in its interim profits as it struggles to contend with the increasing competition from the mobile sector in the world's largest telecoms market.

For the first half of the year, the Chinese carrier posted net income of CNY 14.1bn ($1.77bn), down 4.2% from CNY 14.7bn ($1.84bn) in the year ago period. The markets had been expecting a profit around the CNY 14.3bn ($1.79bn) mark.

Sales meanwhile rose 3.5% to CNY 86.9bn ($10.92bn), compared with CNY 84bn ($10.55bn) a year ago.

"According to the anticipated decline in the traditional voice services as a result of mobile substitution, we have been proactively transforming the operation model and implementing a strategy which focuses on the profit-oriented development of voice services," said CEO and chairman, Wang Xiaochu.

The results for the Beijing-based carrier mirror a similar decline in profits at the number two fixed-line operator in China, when China Netcom Group Corp (Hong Kong) Ltd recently reported a net profit of CNY 7.09bn ($890m), down from CNY 7.69bn ($965m) a year ago. Its sales were up to CNY 43.18bn ($5.41bn) from CNY 42.77bn ($5.36bn) a year earlier.

China Telecom also warned that it would not provide an interim dividend, due to "the company's needs for sustainable business development, its cash flow position, and the need to maintain flexibility in funding". It said it would review the final dividend proposal at the time of reviewing the full year results.

Both carriers are now encountering the same pressures that their Western counterparts have been contending with for the past few years, as the switch to mobile gathers pace. Both China Telecom and China Netcom are banking on services such as broadband and IPTV to act as their future growth engines.

This seems to be working, as China Telecom is principally relying on broadband to drive its growth, after it reported a 45.5% rise in broadband subscriptions to 25.2 million lines, while access lines in general rose 8.1% to 218.7 million.

The Chinese government said recently that the country had a total of 798 million phone users, as of July 2006. This astonishing figure includes 431 million mobile phone users and 366 million fixed-line users.

China Telecom and China Netcom could soon have a chance to compete in the mobile space if they are able to acquire a 3G license, especially if the Chinese government auctions off that spectrum, although it has yet to name a date or even reveal how many licenses it intends to sell.

Meanwhile, earlier this year the Chinese regulators asked China Telecom (as well as China Mobile and China Netcom) to conduct trials of the TD-SCDMA standard (time division synchronous code division multiple access). If given the go-ahead, an expensive network rollout will no doubt soon follow.

Shares in the carrier fell 0.96% on the New York Stock Exchange on Wednesday to $34.17.

Source: Datamonitor

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