China Telecom Profit Beats Estimates as IPhone Lures Users

China Telecom Corp. (728), the country’s biggest fixed-line carrier, posted second-quarter profit that beat analysts’ estimates as the introduction of Apple Inc. (AAPL)’s iPhone lured new users to its wireless unit. The stock climbed.

Net income fell 10 percent to 4.55 billion yuan ($716 million), from a restated 5.05 billion yuan a year earlier, the Beijing-based company said in a statement today. That exceeded the 4.4 billion yuan median of seven analysts’ estimates in a Bloomberg News survey.

China Telecom began offering subsidized iPhone sales on March 9, giving it a new weapon in its battle for smartphone subscribers with larger rival China Mobile Ltd. (941) and boosting usage. China Telecom expects the Apple Inc. device will enhance its long-term growth with “short-term pressure” on profit margins as it accounts for subsidies on the device up front, instead of spreading them over the life of a service contract.

“It looks like the negative impact of iPhone subsidies was not as strong as people expected in the quarter, and average revenue per user was higher than we expected,” said Marvin Lo, a Hong Kong-based analyst at Mizuho Securities. “The rising iPhone and smartphone penetration helped increase” average revenue per user, he said.

China Telecom shares in Hong Kong closed up 4.5 percent at HK$4.17, the biggest gain since July 25, reversing an earlier 4 percent decline prior to the announcement.

Sales Gain

Second-quarter sales rose 14 percent to 70.1 billion yuan, beating the 68.3 billion-yuan median of seven analysts in the Bloomberg survey.

Handset subsidies jumped 50 percent to 11.5 billion in the first six months of this year. The company is investing in subsidies for phones as it works to add 35 million wireless users this year, Chairman Wang Xiaochu told a press conference in Hong Kong today.

“The effect of the iPhone began to show in the second quarter, leading to the increase in mobile subsidies,” Wang told reporters.“In the second half, mobile subsidies will be more or less the same as the first half.”

The mobile unit added 8.35 million users during the period, boosting China Telecom’s subscriber base to 144.2 million at the end of June, the company announced last month. It ranks third in wireless users in the Asian nation, behind China Mobile and China Unicom (Hong Kong) Ltd. (762) China Telecom had 51 million 3G users.

Network Purchase

The company entered the wireless market in 2008 when its parent acquired the smaller of China Unicom’s two mobile divisions in a government-led revamp of the country’s mobile- phone industry. China Telecom currently leases the third- generation network from its state-owned parent and in March 2011 announced plans to buy that network from the parent this year in order to save money on leasing fees.

The company said today it will buy the network for 84.6 billion yuan, which was lower than expected according to analysts including Mizuho’s Lo and Alen Lin at BNP Paribas Securities Asia in Hong Kong.

“We view this positively as we had earlier estimated fair value of 100 billion yuan,” Lin said. “The market chatter in the last couple of weeks was 120 billion yuan.”

China Mobile on Aug. 16 posted a drop in second-quarter net income to 34.40 billion yuan, from 34.42 billion yuan a year earlier. That missed the projection of 35.6 billion yuan, the median of nine analysts’ estimates in a Bloomberg News survey. The company said costs to subsidize handsets will be 26 billion yuan this year, 30 percent higher than it previously projected.

China Unicom reports results for the period tomorrow.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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