China Telecom (CHA) recently announced the acquisition of China Unicom's (CHU) CDMA business for RMB 110 billion (US$16 billion) which has paved the way for its entry into the mobile telephony market.
The company reported lackluster operating results reflected by continued erosion in fixed-line business affecting its profitability. However, the company remains the market leader in fixed-line phone services and is well positioned to benefit from the rapidly growing Chinese wireless market, boosted by its CDMA prospect. The company's attractive long-term opportunities arise from growth in broadband, value-added services, and the emerging need of wireless.
However, adaptability of CDMA service, in the presence of GSM, the prevailing cellular technology standard in China, remains a significant challenge. Additionally, restructuring of the Chinese telecom sector is expected to intensify competition. Considering these factors, we maintain our Hold rating.
Based on our fiscal year 2008 EPADS estimate, the stock is trading at a multiple of 12.4, which is below the industry (Chinese peers) and S&P 500 averages. With respect to other selected valuation metrics, the stock is also trading at a discount to its peer group average. We provide a six-month target price of $55.00 per ADS, using a P/E multiple of 13.4x our fiscal year 2008 EPADS estimate, which we believe reflects the company's prospects.
Anindya Barman contributed to the report.
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