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ChinaWatch: Capex Cuts & Contracts

Ray Le Maistre
3/25/2009

A reduction in spending at China Telecom Corp. Ltd. (NYSE: CHA) and some 3G contract action at China Unicom Ltd. (NYSE: CHU) are at the center of the latest telecom action from the world's biggest potential market.

Profits, capex head south
As expected, China Telecom's 2008 profits were hit hard by a massive writedown of nearly 24 billion Yuan Renminbi (US$3.5 billion) on the value of its PAS (personal access system) assets. PAS is a wireless local access system based on Personal Handyphone System (PHS) technology. (See ChinaWatch: Warning & Surfing.)

That impairment left the operator with 2008 net income of just RMB884 million ($129 million), down more than 96 percent compared with 2007. Without that and other one-time charges, China Telecom's "adjusted" net income was RMB20 billion ($2.9 billion), down nearly 13 percent year-on-year.

The bottom line isn't the only thing shrinking at China Telecom: The carrier has decided to cut its annual capital expenditure budget by 19 percent to RMB39.2 billion ($5.7 billion) this year, just at a time when vendors are looking to China and India to help compensate for spending cutbacks in more mature markets.

The carrier says that 2009 needs to be a year of "stringent capex control," during which the capex/operating revenue margin will shrink from 2008's very high 26.2 percent.

Not all of China Telecom's numbers are on the decline, though. Its 2008 revenues of RMB186.8 billion ($27.3 billion) were up 3.3 percent year-on-year, while its revenues from broadband access grew nearly 29 percent to RMB40.2 billion ($5.9 billion). The carrier ended 2008 with nearly 44.3 million broadband customers.

The operator needs further growth from broadband and from the CDMA mobile assets it inherited from China Unicom in last year's carrier restructuring process to fuel further growth as its core wireline telephony revenues continue to shrink (by 13.7 percent in 2008).

China Telecom has set ambitious targets for its new mobile business, aiming to have more than 100 million subscribers by 2011, by which time it hopes data services will generate more than 35 percent of mobile service revenues. The carrier plans to introduce CDMA EV-DO-based 3G services in the near future. (See China’s Operators Prep Next 3G Wave.)

It has a long way to go, though, as its current CDMA subscriber base is just over 30 million, small fry compared with China Mobile’s current 471 million subscriber base. (See China Mobile Reports 2008.)

"The Company is fully aware that extra efforts are required to expand and consolidate our CDMA services, which are of relatively small scale at present," China Telecom said in a statement.

AlcaLu, Ericsson land Unicom deals
China Unicom has awarded W-CDMA infrastructure contracts to Alcatel-Lucent (NYSE: ALU) and Ericsson AB (Nasdaq: ERIC) as the carrier heads towards the launch of 3G services on May 17.

AlcaLu will supply around 11,000 base stations and a Home Location Register (HLR) database system, as well as network maintenance and optimization, in 14 provinces. Four of these -- Fujian, Jiangxi, Heilongjiang, and Jiangsu -- are new to Alcatel-Lucent and build on the 2G relationship it already had with China Unicom. (See AlcaLu Wins China Unicom Deal.)

Ericsson will supply its WCDMA RAN system, together with network rollout and other support services, in 15 provinces.(See China Unicom Does 3G With Ericsson.)

— Catherine Haslam, Asia Editor, Light Reading

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