China Telecom plans network purchase from parent company

China Telecom Corp Ltd, China's third-largest carrier, said on Tuesday it plans to acquire its parent's code division multiple access network by the end of this year, which has a book value of 120 billion yuan ($19 billion).

Analysts said the move could weigh on its cash flows and ability to pay dividends.

Wang Xiaochu, chairman and chief executive officer of the company, said the purchase will allow China Telecom to operate in a more rational way".

China Telecom has been leasing the network from its parent, China Telecommunication Group. The cost, which reached 19 billion yuan last year, has been rising, especially as the company's third-generation service subscribers increasing rapidly.

While the deal may lower the company's costs in the longer term, it is likely to affect its short-term performance.

"The acquisition of its parent's CDMA network may hinder its cash flow generating ability, and this may have a negative impact on the telecom carrier's profit performance in one particular year," said Patrick Shum, an independent equity analyst.

"The carrier's future ability to pay dividends may also be constrained."

China Telecom reported a net profit of 16.5 billion yuan last year, up 7.5 percent.

China Telecom expects to add more mobile subscribers than last year's 35.95 million and most of them will be 3G users, said Yang Jie, president and chief operating officer.

Although the company lags behind its rivals in the overall telecom market by subscriber numbers and revenues, the three players are more evenly matched in the 3G sector.

By the end of February, China Mobile Ltd, the country's largest carrier, had 56.6 million 3G users, followed by China Unicom (Hong Kong) Ltd's 45.9 million and China Telecom's 41.2 million, according to figures released by the companies.

Last month, China Telecom signed a deal with Apple Inc to sell in China the iPhone 4S, which has nearly 1 billion mobile subscribers, in an attempt to target the top end of the market. Apple previously had an exclusive distribution deal with China Unicom.

Wang said the marketing expenses associated with the iPhone 4S has eroded the company's profits, but the deal will help the company develop more soundly in the long term.

Shum agreed that the carrier may not be able to generate strong profit, even if it can attract more new customers with the iPhone.

"China Telecom must compete fiercely with China Unicom to attract more new customers for its iPhone service," Shum added.

China Telecom declined to provide sales details related to the iPhone 4S.

Shen Jingting in Beijing contributed to this story.

Contact the writers at chenlimin@chinadaily.com.cn and oswald@chinadailyhk.com

(China Daily 03/21/2012 page14)