Chinese telecom companies China Unicom (Hong Kong) Limited (CHU) and China Telecom Corp. (CHA) have won regulatory approval to expand their 4G network trial to 40 cities, up from the previous 16.
In Jun 2014, the carrier duo received the green signal from the Ministry of Industry and Information Technology (MIIT) to conduct a pilot test on two of the most recognised 4G LTE (Long Term Evolution) standards in 16 different cities. The recent sanction extends the trial by 24 additional cities in the mainland, which includes the likes of Beijing, Guangzhou and Tianjin, among others.
Both the companies run their network trial by integrating the TDD-LTE (Time Division Duplex) and FDD-LTE (Frequency Division Duplex) standards. The hybrid options will allow the carriers to provide better connectivity through faster Internet download speed.
However, both China Unicom and China Telecom are way behind China Mobile Limited (CHL), in terms of adding new LTE customers. China Mobile secured a competitive edge in 4G owing to the compatibility of its 3G standard (Time Division Synchronous Code Division Multiple Access or TDSCDMA) with TD-LTE. The largest operator by subscriber base, China Mobile currently has 14 million LTE customers.
China Unicom, the second largest carrier in China, reported top and bottom-line growth in the first half of 2014, while China Telecom, the smallest operator in the mainland, witnessed revenue growth while earnings dipped year over year.
Though initially expensive, we believe 4G will provide a significant opportunity for the two Chinese operators as this sector is still under-penetrated in the nation.
We see this network expansion as an effort by the carriers to curb market leader China Mobile’s dominant foothold in the 4G market. However, to do so, both the carriers need to enhance their handset portfolios, which will duly support their hybrid 4G network. Further, the companies must also focus on aggressive promotion and competitive tariff plans to earn a larger share of the pie, which can, however, impact their margins in the short term.
China Telecom currently carries a Zacks Rank #3 (Hold) while China Unicom has a Zacks Rank #5 (Strong Sell). A stock worth considering within this sector is SK Telecom Co Ltd. (SKM), which bears a Zacks Rank #2 (Buy).
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