China Telecom Set for 3G Revolution

NEW YORK (TheStreet) -- China, the world's largest mobile phone market, recently crossed the one billion mobile connections mark in March. To put this number in perspective, the U.S. currently has just over 330 million active connections in all.

While the Chinese figure may not be reflective of the actual number of mobile users in country, as some of these connections are currently inactive, it is still a compelling statistic that shows the huge growth opportunity that China presents for many smartphone manufacturers. At the same time, it is also a huge opportunity for the incumbent Chinese telecom providers such as China Mobile ( CHL), China Unicom ( CHU) and China Telecom ( CHA)to tap their huge 2G subscriber base and drive the demand for the more lucrative 3G data services.

Of the three Chinese carriers, China Telecom may be the smallest but its subscriber base of over 135 million (135.83 million as of March) easily puts most wireless carriers in the developed world to shame. The largest wireless carrier in the U.S., Verizon, has about 110 million total connections currently and it operates in an increasingly saturated market.

On the other hand, China's 3G penetration is only about 15% and is likely to increase heavily in the coming years as smartphone makers target China. Armed with the iPhone 4S, the Lumia as well as a horde of cheaper Android handsets, China Telecom looks set to ride the widespread 3G transition in the coming years.

We have a $68.45 price estimate for China Telecom stock, about 27% ahead of the current market price.

See our full analysis for China Telecom's stock.

3G Market in China Is an Equitable Mix

With close to 670 million subscribers, China Mobile is the largest wireless carrier in the world and has almost six times as many subscribers as China Telecom. But when it comes to 3G, the difference is not nearly as much. As of March 2012, China Mobile had around 60 million 3G subscribers, only about 36% ahead of about 44 million that subscribe to China Telecom's 3G network.

China Telecom announced last week that it had added 2.4 million 3G subscribers in March, which is about 30% of the overall 3G adds for the month in China. Low 3G penetration in China is giving smaller wireless carriers such as China Telecom ample opportunity to compete on an even ground with the otherwise dominant China Mobile.

China Telecom has also been helped by the fact that China Mobile currently runs its 3G network on a homegrown proprietary TD-SCDMA standard that is not compatible with many smartphones.

That may soon end, however, as Qualcomm recently launched a wireless chipset that supports the standard, making it likely that many popular smartphones, including the iPhone 4S, could be making their way to the carrier before the year end.

However such a deal has not been officially announced yet and China Telecom will be looking to make the most of its iPhone opportunity before that happens.

Margin Pressures

While the arrival of the iPhone on China Mobile could potentially be a huge blow to China Telecom, it is not banking on the popular smartphone alone to drive 3G adoption. The carrier recently came up with a strategy to sell low-cost 3G smartphones made by ZTE, Huawei and Lenovo that run on its 3G network. Considering that the Chinese market is still in an evolving stage, the demand for cheaper Android smartphones is huge. Moreover, subsidizing these smartphones doesn't put as deep a dent on its margins as an iPhone does.

Driving 3G adoption will serve to drive the ARPU levels of China Telecom further, as has been the case in the developed world. Carriers such as Verizon, AT&T and Sprint in the U.S. have seen rapid growth in mobile data revenues over the past few years, driven by growing demand for 3G-capable smartphones. This has come even as their voice ARPUs declined, a trend that can be seen in the Chinese telecom market as well. China Mobile's voice ARPU levels have declined from above $7.30 levels in 2007 to about $6.60 in 2011, by our estimates.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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