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CHA: China Telecom Company Stock Analysis

By on January 10, 2007

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This is part 4 of Chinese Stocks to Watch in 2007 Series.

China Telecom Corporation Limited (CHA)

China Telecom Corporation Limited is a telecommunications and information service provider in China. The principal businesses of the Company includes provision of wireline telecommunications and other relevant services, including local telephone, domestic long-distance telephone, international long-distance telephone, Internet and managed data, leased line and other related services to its subscribers within the service area of the Company. The principal business of the Company is investment holding. The Company is the provider of wireless telecommunications services in Shanghai municipality, Guangdong province, Jiangsu province, Zhejiang province, Anhui province, Fujian province, Jiangxi province, Guangxi Zhuang autonomous region, Chongqing municipality, Sichuan province, Hubei province, Hunan province, Hainan province, Guizhou province, Yunnan province, Shaanxi province, Gansu province, Qinghai province, Ningxia Hui autonomous region and Xinjiang Uygur autonomous region in China. (Source: MSN Money)

China Telecom shares have recently spiked, and currently trade at $48 a share. This is another big time stock in the fast growing Chinese stock market. Here’s my insight on why investors should pay attention to CHA in the near feature.

The Business Model

China Telecom provides local and long distance phone service to 20 different Chinese provinces. This business should continue to experience growth as more and more international communication is conducted between China and the USA in particular. I would compare China Telecom to America’s AT&T because both companies are heavyweights in their nations. Also, the Chinese always seek out cheaper ways to communicate via internet, which is why China Telecom offers VoIP. The only knock on their VoIP service is that they must compete with eBay’s Skype VoIP service. While competition against the world’s largest marketplace is stiff, China Telecom makes most of their money via local and long distance phone service. Their VoIP is only a small portion of their gross earnings.

I love the China Telecom business model. It’s all about connecting users to the rest of the world. So far, broadband internet and VoIP markets have lots of room to grow. Chinese corporations and the Chinese government will also use China Telecom data transfer services to exchange data between clients. Data transfer only makes up 1.9% of their gross profit, but as more businesses invest in China, we will see a growth in the data transfer business. Businesses need reliable data networks, and China Telecom offers first class business services.

Broadband Internet Growth

What percentage of Chinese households has high speed internet access? Only 8.62%. Now, you see where I’m going with this. There’s lots of growth potential in the Chinese high speed internet market. Even though 33% of US households have broadband internet access, the Chinese have more total broadband subscribers due to their massive population.

Long Term Growth

5-year Earnings growth is projected at 9%. Broadband, data transfer, and VoIP services will represent the best growth opportunities.

The company has a PEG Ratio of 1.60, which is not a good sign for growth investors. As for value investors, China Telecom is a well positioned giant in the Chinese telecommunications market. Investors will own a company that grows with the wealth of the Chinese middle-class as well as Corporate China. And with exports growing from 11 billion in 2001 to 90 billion in 2006, China is making more business relationships and contacts than ever.

Valuation

Quarter over quarter sales has been sluggish, standing at only 3%. As compared to China Telecom’s competitors though, the firm has performed extremely well over the long-term. In 5 years of operation, sales grew at 19% annually. I expect sales to pick up in 2007, especially with all the recent hype over Chinese product exports.

In terms of P/E ratio, this stock is very cheap.

  • 5-Year P/E High: 195
  • 5-Year P/E Low: 65
  • Current P/E: 14

Price over book value is 1.63 – another sign that the stock is fairly cheap.

Financial Condition

China Telecom owes quite a bit of debt, but management has effectively reduced the long-term debt over the past 52 weeks. The company is committed to repaying long-term debt, while increasing its cash position and retained earnings at the same time. My only concern is the rising short-term debt. But with over $22 billion in free cash flow, the company has plenty of cash to repay creditors. If short-term debt continues to increase, investors should signal a red flag. Is the company committed to returning value to shareholders or increasing its spending power?

When to Buy Shares

Trading at 14 times earnings, shares are cheaper than usual. Just imagine that some investors paid 192 times earnings for CHA shares. That’s way too expensive for us.

So what do you get at the end?

  • Chinese telecommunications company that’s well positioned for VoIP and broadband internet growth
  • A value play on the Chinese stock market
  • 12% Average return on equity
  • 1.89% dividend yield

The next part of this series will be posted this weekend. This is an ongoing series, so take the time to subscribe to our feed and keep up with the hottest Chinese stocks for 2007.