China telecom sector-Halftime report: what 1H14 results mean for upcoming 2H14 season

Event.

    Post the release of 1H14 financial results by the three incumbent telecomoperators, we provide a quick summary of key trends and outlook for 2H14.

    Impact.

    Revenue: Due to the implementation of value-added tax (VAT) on June 1, webegin to see slower growth momentum for the operators’ revenue. For 2H ofthis year, as VAT will have a full 6-month impact upon the P&L, we expect thenegative impact will be more apparent (Figure 1).

    EBITDA margin: China Unicom delivered the largest y-y improvement inEBITDA margin. The company enhanced its EBITDA margin by 2.7 pptbetween 1H13 and 1H14. We believe the change of mobile termination rates(MTRs) and disciplined approach towards selling and marketing expense arethe major reasons (Figure 3).

    Blended ARPU trend: Of the three operators, only China Telecom achievedy-y improvement of its blended ARPU. China Mobile’s blended ARPUcontinues to be hampered by its declining 2G business and its 4G business isstill not big enough to help the overall franchise (Figure 7).

    Capex spend: We believe China Telecom and China Unicom withheld theirrespective capex investments in the 1H to take advantage of input VATcredits. On the other hand, China Mobile is taking a more proactive approachtowards spending capex to speed up the rollout of its 4G network (Figure 8).

    Outlook.

    Our order of preference remains: China Telecom (Outperform) > ChinaUnicom (Outperform) > China Mobile (Neutral).