China Telecom Corp. (728), the nation’s third-largest mobile phone company, starts sales of Apple Inc. (AAPL)’s iPhone today, drawing subscribers with subsidies the company has said may crimp profit.
The iPhone’s introduction will probably boost the carrier’s subsidy costs by 19 percent to 24.1 billion yuan ($3.8 billion), said Alen Lin, an analyst at BNP Paribas Securities Asia in Hong Kong. He cut his rating on China Telecom this week to “hold” from “buy,” citing sales promotion costs for high-end devices.
A 16-gigabyte iPhone 4S costs 4,988 yuan ($790) at Apple’s online store, or more than two months’ wages for the average urban worker in China. China Telecom, using subsidies to attract subscribers, said last month new customers who sign up for three years can get a free handset with monthly service plans as low as 289 yuan.
“The introduction of high-tier devices such as the iPhone 4S is a near-term risk to profitability, given the possible high handset subsidy costs,” Lin said in a March 6 note to clients. “Recent market sentiment has been strong for China Telecom. We believe the market will soon shift focus to the expense side of the equation.”
For China Telecom, the iPhone will “significantly enhance its long-term sustainable growth,” Chief Executive Officer Wang Xiaochu said in a Feb. 21 statement announcing plans to sell the handset. Costs related to the iPhone will mean “short-term pressure” on profitability, he said.
About 30 customers were in line when iPhone sales started at 2 p.m. at a China Telecom outlet in the Xidan shopping district of western Beijing.
One of the first in line was Jeff Huang, who said he wanted an iPhone to make FaceTime video calls to family and friends in other parts of China. He signed up for a three-year plan with a commitment of 189 yuan a month that got him an iPhone 4S for 1,699 yuan. That’s a discount of about 66 percent off the price at Apple’s online store.
“This package was suitable for me,” said Huang, a 35- year-old manager in an export-processing factory. He said his purchase was a switch from both his old carrier, China Mobile Ltd. (941), and the device brand, Nokia Oyj (NOK1V), that he’s used for years.
China Telecom fell 2.4 percent to close at HK$4.47 in Hong Kong, trimming this year’s gain to 1.1 percent, compared with the 14 percent advance of the benchmark Hang Seng Index.
China Telecom is rated “buy” by 26 analysts among the 38 tracked by Bloomberg. The stock is rated “hold” by nine and “sell” by three of them.
China Telecom becomes the nation’s second wireless operator to offer iPhone after China Unicom (Hong Kong) Ltd. (762), which first offered it in October 2009, and began selling the 4S in January.
For Apple, adding China Telecom’s 38.7 million 3G subscribers at the end of January does almost double its reach among users of 3G service who could get the device with a carrier subsidy. China Unicom had 43 million users at the end of January.
China Mobile Ltd., the world’s largest carrier by customers, is now the only Chinese wireless company not offering the iPhone with a service contract. The iPhone doesn’t support the provider’s third-generation network, which is based on a technology developed in China.
China Telecom’s introduction of the handset after its rival may limit sales, because many customers who want the iPhone already have it, said Lisa Soh, a Hong Kong-based analyst at Macquarie Group Ltd. She cut her rating to “underperform” from “neutral” previously. Costs for the device will cause a drop in profit this year, she said.
“China Telecom will have to squeeze hard to get any remaining iPhone juice, leading to higher costs and lower upside than what the market may expect,” Soh wrote in her March 5 note to clients.
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