China Telecom Shares Downgraded To Neutral By Citi

Citi has downgraded China Telecom Corporation Limited (ADR) CHA shares to a rating of Neutral citing a broadband competitive hit. The brokerage's top pick in the space is China Mobile Ltd. (ADR) CHL on broadband and 4G growth in the telecom sector.

Moving To Neutral

Citi analyst Bin Liu said in a research note to clients, "CM's broadband competitive hit to CT won't be significant before 2017 — In the face of CM aggression, fixed-line market leader CT faces the risks of a gradual slowdown in broadband subs growth, ARPU pressure and higher selling costs to defend market share."

Related Link: Just How Big Is China Mobile?

However, the analyst believes the impact will not reach a level of significance until after 2017, "as broadband subs in China are normally locked into contracts of more than one year and China Mobile needs time to upgrade its nationwide broadband network." For China Telecom, strong growth in the fixed-line market is seen as a partial barrier.

China Mobile's Advantage

Liu thinks that with China Mobile turning aggressive in broadband following its Tietong acquisition, its market share should jump to 25 percent in 2018 from 19 percent last year and fixed broadband to be 5.7 percent of total service revenue in 2018, up from 3.1 percent in 2015.

According to the brokerage, China Telecom generated most of its EBITDA from fixed line — i.e., 76 percent estimated in 2016. Therefore, the analyst believes that the company would likely to be a biggest loser due to China Mobil's broadband push. Therefore, Citi preferred to downgrade China Telecom. The brokerage also reduced its FY17–18 estimated earnings by 5–7 percent.

At Time Of Writing...

• Shares of China Mobile were down 0.14 percent at $55.63.
China Telecom was down 0.11 percent at $43.68.