While hardly a surprise, spending cuts by the Chinese operator will add to the pressure on equipment vendors this year.

Iain Morris, International Editor

March 21, 2017

3 Min Read
China Telecom to Cut Capex by 8% in 2017

China Telecom has delivered unwelcome news to its equipment suppliers, announcing plans to slash capital expenditure by as much as 8% this year.

The service provider, which competes against China Mobile Ltd. (NYSE: CHL) and China Unicom Ltd. (NYSE: CHU) in China's fixed and mobile telecom markets, said in an earnings update that it would spend about 89 billion Chinese yuan ($12.9 billion) this year, with 73% of that figure earmarked for investment in 4G and fiber networks.

The operator plans to add another 270,000 4G basestations to its footprint, which included about 1.16 million basestations at the end of last year. It is also prioritizing the rollout of NB-IoT, a network technology designed to provide connectivity for smart meters and other machine-based devices that transmit small amounts of bandwidth on a regular basis.

The capex forecast may not come as a big surprise to equipment vendors -- which have spoken frequently about the slowdown in China's maturing 4G market -- but it follows a similarly sharp reduction in investment activity last year, when capital expenditure fell 11.3%, to RMB96.8 billion ($14 billion).

China Telecom Corp. Ltd. (NYSE: CHA) has been looking to cut costs partly through a network-sharing deal with China Unicom, which has seen the two companies pool 4G and optical resources.

Both players have been under considerable pressure from market leader China Mobile, which has rapidly become the dominant service provider in the country's burgeoning 4G market.

While China Telecom managed to double its number of 4G customers last year, to about 122 million, it remains a long way behind China Mobile, which ended February with nearly 559 million 4G subscribers on its books.

China Mobile serves about 854 million mobile customers altogether, while the latest figures show that China Telecom has just 215 million.

That makes it the smallest of China's three national mobile operators but the second-biggest 4G player: China Unicom had 266 million mobile customers last month, including 116 million on its 4G network.

Thanks largely to growth at its mobile business, which added 17.1 million new customers last year, and the take-up of 4G services, China Telecom reported a 6.4% increase in revenues in 2016, to RMB352.3 billion ($51.1 billion).

But the sales growth proved costly. Earnings (before interest, tax, depreciation and amortization) rose just 1.1%, to RMB95.1 billion ($13.8 billion), and net profit tumbled 10.2%, to RMB18 billion ($2.6 billion).

In a statement, China Telecom blamed the fall in profits on the fact that net income was dramatically boosted in 2015 by the sale of towers. Excluding the impact of that deal, the bottom line would have risen 11.7%, said the company.

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With consumer markets looking increasingly saturated, all three Chinese operators are increasingly focusing on opportunities in areas such as cloud computing, the Internet of Things and big data.

While revenues from such activities are growing fast, they still contribute very little to the sales total.

China Telecom, for instance, made RMB1.5 billion ($220 million) from cloud business in 2016, 48.8% more than in 2015, and RMB410 million ($59 million) from big data activities, up 81.4% on the 2015 figure.

Despite all the industry attention on mobile, China Telecom's fixed-line business remains the biggest contributor to the top line, generating RMB180 billion ($26.1 billion) in revenues last year, 3.1% more than in 2015.

Sales growth was driven by an increase in the number of customers using high-speed broadband services. China Telecom finished the year with about 106 million fiber-to-the-home subscribers, up from 71 million at the end of 2015.

The operator's share price closed down 1.05% in Hong Kong earlier today, at 3.78 Hong Kong dollars ($0.49).

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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