China Telecom Corp Ltd (H) (728 HK)'s first-half 2017 result was strong with services revenue up 6.8% and EBITDA up 3.7%. Mobile services revenue growth of 12.2% was a highlight compared with peers' 5%-6% growth, but like China Unicom Hong Kong Ltd (762 HK), it is feeling the pressure in the fixed broadband market from China Mobile Ltd (941 HK)'s assault. Earnings leverage on this sort of revenue growth would normally be stronger for a telecom company given a high fixed cost base but each of the Chinese telecom companies are still being hampered by higher costs associated with base station leasing fees to the tower company. Increased competition in the mobile market with China Unicom now much more competitive in the mobile market.

We retain our fair value estimate of HKD 4.30 per share while our ADR fair value estimate rises to USD 65 from USD 62 on the back of U.S. dollar weakness since our last update. We also make no changes to China Telecom’s narrow economic moat which stems from cost advantages and brand strength. While the mobile business has fewer moat characteristics given its 16% share of the market, we continue to believe it is highly unlikely the Government will allocate more mobile network licenses in the market.

Analyst: Dan Baker

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