China Tele buys parent's 3G assets for $13 bn, shares rally

China Telecom Corp Ltd, the smallest of China's three mobile carriers, said on Wednesday it would acquire 3G network infrastructure from its parent for an initial USD 13.3 billion to cut future costs, sparking a rally in the company's shares.

It announced the deal as it posted a 10%-fall in quarterly net profit, the biggest drop since the second quarter of 2010, reflecting higher spending on handset subsidies as it tries to draw users in a market of a billion mobile subscribers.

"Though we remain positive on the long-term outlook of CT, we believe higher marketing and handset subsidy expenses will weigh on its profit margins in the near-term," Alen Lin, an analyst with BNP Paribas in Hong Kong, wrote in a note before the results. He said the comment remained valid following the earnings report.

"We believe the shift toward high-tier devices such as iPhone 4S will improve China Telecom's long-term subscriber profile at the expense of short-term profitability," the note said.

China Telecom shares rose 4.5% - outpacing its rivals China Mobile and China Unicom - as investors estimated the acquisition of the network infrastructure would trim costs in the long term.

China Telecom said it would acquire the CDMA assets of its parent company, state-owned China Telecom Corp, for an initial consideration of 84.6 billion yuan. It currently leases bandwidth from its parent, a cost that would rise as its subscriber base grows, analysts said.

In a statement, the company said the final consideration could be 87 billion yuan, which did not include 30 billion yuan in liabilities. That suggested the final value of the deal would be more than 117 billion yuan.

Still, analysts said that represented a lower than expected figure. Before the announcement, they had estimated the enterprise value of the deal at some 126 billion yuan.

China Telecom, which is also the country's biggest fixed-line operator, said first-half net profit fell to 8.814 billion yuan from a revised 9.616 billion yuan a year earlier. The outcome was slightly higher than expectations for a profit of 8.72 billion yuan, according to four analysts surveyed by Reuters.

That meant that it returned a net profit of 4.54 billion yuan in the April-June quarter, above a forecast of 4.45 billion yuan but down from 5.046 billion yuan a year earlier, according to calculations made by Reuters from the company data.

The slide in profits from a year earlier largely reflects spending on subsidies and marketing to try to sell more higher revenue-earning smartphones, a strategy that is likely to benefit its bottomline in the long-term when it captures high-end subscribers, analysts said.

China Telecom signed a deal with Apple Inc earlier this year to carry iPhones as part of its efforts to draw more higher-end 3G users into its network.

It had 147 million mobile subscribers as of July, including 54 million 3G subscribers. That compares with market leader China Mobile, which has 688 million subscribers, of which 69 million are signed up to 3G.

Excluding the iPhone, the company used 23% to 24% of its revenues on handset subsidies, executives said.

"The company believes that the launch of the iPhone to expand the high-end market would require an appropriate increase in marketing initiatives which would create short-term pressure on profitability, however, it would enhance long-term sustainable growth and value creation for the company," China Telecom said in its results statement.