China Telecom to buy Beijing Telecom, seek Olympic growth

Hong Kong-listed China Telecom announced it is to acquire Beijing Telecom, a branch arm of China Telecom Group. China Telecom will pay RMB5.56billion (€0.5 billion) for Beijing Telecom. 

China Telecom Group is a former monopoly and the biggest state-owned, fixed-line operator in the Chinese market. The Group holds more than 70% of China Telecom, which has 20 provincial sub-companies in South China.

This is a good move for China Telecom that will boost its bottom line and enlarge service coverage through internal integration. Also, it is a well trodden path China Telecom to absorb units owned by its state-controlled that are performing well: in 2003 and 2004, it acquired six and ten provincial units to achieve coverage of the whole of South China.

China Telecom has been facing stiff competition from China Mobile as customers are increasing opting for Fixed Mobile Substitution (FMS). Its traditional voice business has been declining in recent years. Its annual report for 2007, published this week, showed that China Telecom's fixed voice subscribers fell by 2.71million to 220 million, and net profit was RMB22.5 billion (€2.05 billion), a year-on-year increase just 1.1%.

Now Beijing Telecom will be the first northern business unit belonging to the Group to become part of China Telecom. Beijing Telecom achieved RMB2.46 billion (€0.22 billion) revenue and RMB470 million (€42.9 million) net profit last year. Beijing is a highly developed broadband market: at the end of 2007, almost half its residents were accessing the Internet, around 70% through broadband, according to CNNIC.

The Beijing IPTV market is potentially huge and strong growth is expected around the Beijing Olympics this summer. For all these reasons, the absorption of Beijing Telecom should improve China Telecom's performance indicators in 2008.

However, this improvement is not likely to be substantial. There are two issues to consider. First, China Netcom was created in 2002 from the assets of ten northern provinces' of the former monopoly and Beijing Telecom was also set up then. Though Beijing Telecom is growing fast growth, it faces tough competition from China Netcom in broadband and value-added services.

Secondly, China Telecom will have a huge lag when it starts to offer mobile services, although the CEO of China Telecom, quoted in newspaper, recently said that he expected that the reorganisation of the telcos will happen soon: for example, how split up the GSM and CDMA networks of China Unicom has long been the subject of debate.

Any way we slice it, in short term, we cannot see China Telecom will be able to offer effective bundling service to compete with China Mobile and stop the trend of FMS as well.

Charice Wang, Research Analyst

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