China Telecom's net profit soared by 24.4% Tianyi Cloud or will be spun off and listed

Per reporter: Yang Yu Per editor: Dong Xingsheng

On the evening of March 17, China Telecom (601728, SH; yesterday's closing price of 4.03 yuan) released its 2021 annual report.

According to the annual report, its revenue in 2021 was 434.2 billion yuan, an increase of 11.3% year-on-year, and the net profit attributable to the shareholders of the parent company was 25.952 billion yuan, an increase of 24.4% year-on-year. In terms of sub-business, emerging services such as data centers and cloud computing have become the main growth force of China Telecom and even the entire telecommunications industry. This can be seen in China Telecom's capital expenditure plan for 2022. According to the promotional materials of China Telecom's performance briefing, China Telecom expects capital expenditure of 93 billion yuan in 2022, of which the capital expenditure of 5G network will decrease by 10.39% year-on-year, while the capital expenditure of industrial digitalization will rise by 61.67%.

Data source: reporter collation Every reporter Zhang Jianzhao

Obviously, China Telecom is full of confidence in its future development prospects. Taking the cloud business as an example, among the comparable companies in the industry, China Unicom (600050, SH; yesterday's closing price of 3.53 yuan) has a Unicom cloud revenue scale of 16.3 billion yuan, while China Telecom's Tianyi cloud revenue scale has reached 27.9 billion yuan. China Telecom executive director, chairman and CEO Ke Ruiwen also said in recent days that it will explore the possibility of Tianyi Cloud spin-off and listing.

However, China Telecom's performance is in stark contrast to its performance in the capital market, and its stock price is still lower than the issue price. In this regard, China Telecom said at the performance briefing on the evening of March 17 that it would stabilize the stock price by increasing the holdings of the parent company and increasing the level of dividend payouts.

Increase the sales of terminal goods

In terms of sub-business segments, the commodity sale business is one of the two carriages driving the revenue growth of China Telecom. According to the annual report, commodity sales and other business mainly refer to the sale of mobile terminal equipment and fixed-line communication equipment to users. In 2021, China Telecom's revenue from the sale of goods and other businesses reached 31.332 billion yuan, an increase of 15.191 billion yuan (an increase of 94.11%) compared with 2020, accounting for 34.35% of its annual revenue growth.

In contrast, China Unicom's revenue from the sale of communication products in 2021 was 31.701 billion yuan, an increase of only 13.12% year-on-year.

China Telecom's ability to catch up may be related to its efforts to increase the sales of 5G terminal goods. According to the 2021 annual report, during the reporting period, China Telecom's advertising and publicity expenses were about 2.904 billion yuan, an increase of 9.11% year-on-year; customer service expenses were about 4.104 billion yuan, an increase of 24.56% year-on-year. At the same time, China Unicom's advertising and business promotion expenses were about 2.682 billion yuan, down 1.51% year-on-year, and the increase in user services and other expenses was far less than that of China Telecom.

In addition, China Telecom's 5G coverage scale on the C-end is also slightly better. From 2020 to 2021, China Telecom's 5G package user penetration rate will increase from 24.6% to 50.4%, with 188 million 5G package users. At the same time, China Unicom's 5G package user penetration rate rose from 23% to 48.9%, with 155 million 5G package users.

Looking to the future, China Telecom said at the performance briefing that it plans to increase the number of mobile service users by 15 million and 5G package users by 80 million in 2022. In addition, China Telecom currently has more than 690,000 5G base stations in use, and it plans to invest about 34 billion yuan in the 5G field in 2022, and it is expected that the number of 5G base stations in use will exceed 990,000 stations by the end of this year.

It is planned to increase investment in industrial digitalization

The industrial digitalization business is another horse-drawn carriage driving China Telecom's revenue growth. According to the annual report, the business is to provide users with Internet data centers, cloud services, digital platform services, private line services and other services. In 2021, the revenue of digital business in China's telecom industry reached 98.945 billion yuan, (after excluding the impact of the revenue from the sale of subsidiaries) increased by 19.4% year-on-year, and the growth rate was significantly higher than that in 2020 (9.7%); the specific growth rate was 14.976 billion yuan, accounting for 33.87% of its annual revenue growth.

According to China Telecom's performance briefing, it will significantly increase the scale of investment in industrial digitalization business in 2022, and the capital expenditure in the field of industrial digitalization will rise by 61.67% to 27.9 billion yuan, accounting for 30% of total capital expenditure; at the same time, the capital expenditure of 5G network will be reduced by 10.39% to 34.038 billion yuan, accounting for 43.8% of total capital expenditure from 43.8% to 36.6%.

In fact, in recent years, the growth rate of users in the telecommunications industry has been under downward pressure, and emerging digital services for enterprises such as cloud computing, big data, and data centers have become the first driving force for the growth of telecom business revenue.

At present, the revenue of industrial digital business has accounted for 22.79% of China Telecom's total revenue, becoming the third largest source of income after traditional services such as mobile communication services, fixed networks and smart home services. China Telecom said that in the next three years, the proportion of industrial digital revenue should increase to more than 30%.

In addition, according to China Unicom's 2021 annual report, although the revenue scale of its industrial Internet business is not as large as that of China Telecom, the revenue growth rate of this business is even faster than that of China Telecom, with a year-on-year increase of 28.2%, accounting for 18.5% of the overall main business revenue.

However, the revenue gap between the two in the cloud business is still large. Among them, the revenue of China Telecom's "Tianyi Cloud" increased by 102% year-on-year to 27.9 billion yuan in 2021, while the revenue of China Unicom's "China Unicom Cloud" was 16.3 billion yuan, an increase of 46.3% year-on-year.

It is worth mentioning that Ke Ruiwen recently said at the performance briefing that China Telecom will actively explore the possibility of Tianyi Cloud spin-off and listing under the condition of complying with regulatory rules.

China Telecom also admitted that there is still a gap between its industrial digitalization level and the requirements of the development of the digital economy. In the past two years, with the rapid development of the digital economy, the update and iteration of products and services have accelerated, and customer needs have become more diversified and personalized. There is still a certain gap between China Telecom and customer needs in terms of products and services, performance, experience, etc.

The current share price is lower than the issue price

In 2021, China Telecom returned to A and listed, raising about 47.5 billion yuan. Affected by this, China Telecom's financial indicators in 2021 have improved.

Specifically, China Telecom's monetary funds increased by 42.119 billion yuan, an increase of 127.28% year-on-year. At the same time, as the funds raised by A-shares met the capital needs of key projects, China Telecom's external financing needs declined, with short-term borrowings falling by 82.37% year-on-year and long-term borrowings falling by 68.95% year-on-year.

Overall, in 2021, the scale of China Telecom's interest-paying debt fell from 53.342 billion yuan to 16.496 billion yuan, down 69.1% year-on-year; the asset-liability ratio fell from 48.8% to 43.4%; and free cash flow also rose from 14.276 billion yuan to 15.139 billion yuan. In this regard, China Telecom described in the promotional materials of the performance briefing that the company has a stable capital structure and abundant cash flow.

However, although China Telecom's performance level and financial strength continue to grow, the capital market seems to be hesitant. As of March 21, 2022, China Telecom closed at RMB4.03 per share, still below its issue price. At the same time, a number of brokers have given a target price of 5 yuan or even more than 6 yuan.

China Telecom's measures to stabilize the stock price are mainly to increase the shares of the parent company and increase the dividend payout ratio. According to the relevant announcements of China Telecom, its parent company, China Telecom Group, plans to increase its shareholding in the listed company within 12 months from September 22, 2021, with an increase of not less than 4 billion yuan. In addition, China Telecom Group will increase its holdings by not less than 500 million yuan in the 12 months from January 28, 2022.

China Telecom said it would pay a dividend of RMB0.17 per share (including tax) to all shareholders at a dividend rate of 60% this year. "At this dividend yield level, A-share dividends (rates) can exceed 4% and H-shares dividends (rates) can exceed 7%, [this] is an attractive level of dividend returns," Ke Ruiwen said at the results briefing. In addition, China Telecom also promised that within 3 years after the issuance and listing of A shares, the profits distributed in cash each year will gradually increase to more than 70% of the profits attributable to shareholders of the company in that year.

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