China Telecom Big in Fixed-Line
China Telecom (CHA) announced that it was purchasing China Unicom's (CHU) CDMA business. The deal will cost China Telecom and its parent around $16 billion, which is too expensive compared with market expectations.
For the past few quarters, China Telecom has reported mediocre operating results compared with Chinese mobile operators. Still, China Telecom is the market leader in fixed-line phone services in one of the world's fastest growing telecom markets. Its attractive long-term prospects arise from growth in broadband, value-added services, and cross-selling of wireless services. Thus, we maintain our Hold rating on the stock.
Based on our estimate for fiscal year 2008 earnings per ADR, the stock is trading at 15.4x, which is below the industry average and its Chinese peers. Based on our estimate for fiscal year 2009 earnings per ADR, the stock is trading at 14.5x, which is also below the industry average. Using a P/E multiple of 15.2x our fiscal year 2009 earnings per ADR estimate yields a target price of $66.25, which we believe reflects the company's prospects.
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