China Telecom: provincial investment

Potential subscriber base of half a billion

China Telecom Corp Ltd, the Hong Kong-listed arm of China Telecom, will expand its potential subscriber base to half a billion people, after announcing it would pay its state-owned parent CNY46 billion ($5.55 billion) to acquire six provincial fixed-line networks. The regions have high growth potential, although significant investment will be needed.

China Telecom has been in talks with its parent over the acquisition since July. Under the terms of the deal, it will pay an upfront cash payment of CNY11 billion ($1.32 billion). The remaining CNY35 billion ($4.22 billion) will be paid out over 10 years after the deal is completed. China Telecom will also assume CNY34 billion ($4.10 billion) in debt owned by the six networks. It will use the proceeds of last year's IPO to finance the deal.

The purchase price values the six networks at 7.2 times their forecast net profit, which is estimated this year to be in the CNY6.35 billion ($767 million) region. For the six-month period ending June, China Telecom reported a net profit of CNY9.26 billion ($1.11 billion). The company believes the acquisition will raise earnings by about 30% in the first half.

At the moment, China Telecom controls some of the richest areas in China, including Shanghai, and the provinces of Jiangsu, Zhejiang, and Guangdong. These areas currently have a penetration rate of 25.7%.

The six networks it plans to buy include the provinces of Anhui, Fujian, Jiangxi, Sichuan, and Guangxi, as well as the city of Chongqing. These networks are viewed as potentially high-growth areas, as the penetration rate lags at 13.4%, lower than the national average. However, these regions are also poor and require significant investment.

Following the acquisitions, China Telecom's footprint in mainland China is set to rise dramatically, to potentially 524 million people, or 40.8% of the total population in China. It currently has a 107 million-strong subscriber base.

However, China Telecom is facing increasing competition in its fixed-line and broadband business. Its rival, China Netcom, has been rolling out services in China Telecom's market, mainly in the richer cities of Shanghai and Guangzhou.

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