Get your last looks at the China Telecom (NYSE:CHA) you know and love, because I don't think it will stay this way for much longer. While China Telecom is a major player in fixed-line telephony in China (serving largely the south, including the city of Shanghai and the Guangdong province), both it and rival China Netcom (NYSE:CN) realize that their growth potential rests more on future mobile phone franchises than fixed-line telephony.
Look at results for the first half and you'll see why I say that. Revenue was up 6% and profits were up only about 8% for the period -- and that's excluding the soon-to-be discontinued interconnection fees. Had those fees been included in both periods, profit would have been almost flat.
To be clear, I don't think China Telecom executives are doing a bad job. Rather, they are just facing the inevitable decline of fixed-line telephony as a profit center -- something other carriers like Philippine Long Distance (NYSE:PHI) and PT Telekomunikasi (NYSE:TLK) have dealt with in their respective countries. Looking at the first half, local voice revenue rose only 0.7% and long distance revenue dropped almost 3%. In contrast, Internet access revenue rose by more than 29% and "value-added service" revenue rose 56%.
Looking ahead, China Telecom wants to get into the mobile phone game in a big way, but it has not yet secured a 3G license. (There will be only three.) Even if the company cannot get one, the general expectation is that it will buy someone that does -- perhaps China Unicom (NYSE:CHU), for instance.
In any case, management is already preparing for the expense of building out a 3G network in the eastern cities of China -- a target area, given that most of China's wealth and prosperity is concentrated on the eastern coast. The board has decided not to pay an interim dividend so as to conserve financial resources, and the company is already talking about issuing more than $1 billion in debt to pay for the build-out.
That China Telecom is likely to take on the risks, expense, and benefits of a 3G network makes valuation a bit trickier. And that's to say nothing of the risks of competing against the likes of China Mobile (NYSE:CHL) for subscribers. China Telecom doesn't look that expensive today, presuming that the company does get access to a 3G license. Even so, I think I'd rather own China Mobile for now.
For more Foolish Chinese Take-outs:
- Sinopec Feels the Squeeze
- Grounded in China
- China Unicom's Financial Hangups
- China Mobile Still on the Move
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
