China Telecom – Q4 24 Quick Take: Faster topline, capex cut positive for improving cash flow; dividends within expectations

What’s new: China Telecom reported faster service revenue growth in Q4, led by improvement in mobile and Industrial Digitalization. Although EBITDA declined from higher staff cost, we view it as supportive for future topline growth as AI demand continues to rise. Earnings accelerated on lower D&A and tax whilst the company had announced a 11% increase in dividends for the full year, in-line with us. As with peers, the operator has guided for a lower absolute capex in 2025 (RMB 83.6bn, -10% YoY). Our quick takeaway below.

In-line shareholder remuneration; encouraging capex guidance. The company proposed a final dividend of RMB 0.093/share, taking its total dividend per share to RMB 0.26/share (+11% YoY). This implies a 72% payout (2023: 70%), in-line with our expectation as the company moves towards its previously guided 75% payout by 2027. Alongside peers, the company has guided for a fall in capex for 2025 to RMB 83.6bn, down 10% YoY with higher mix being allocated towards computing investments as mobile capex falls.

Improved service revenue trend led by Mobile and Industrial Digitalization. China Telecom’s 4Q24 service revenue improved to 3.4% YoY from 2.5%, driven by improvement in Mobile and Industrial Digitalization. Mobile communication revenue grew by 4.5% YoY from 2.6% on the back of ARPU growth, which helped offset the slight decline in Wireline and Smart Family (-0.3% YoY from 2.4%). Industrial Digitalization picked up pace as it grew 4.8% YoY from 2.8%, marked by continued growth in China Telecom Cloud (RMB 113.9bn in 2024, +17%) where it remains the market leader in SOE public. For the year, the newly developed AI+, comprised of AI and intelligent computing services doubled to RMB 8.9bn (US$ 1.2bn) while Quantum+ saw its revenue tripled, although contribution is likely small at this stage. With the utilisation of intelligent computing utilisation already past 90%, it signals further computing investments and headroom for growth.

Despite the macro headwinds, we are bullish on Enterprise opportunity in China over the medium term. Amongst the three operators, China Telecom remains the most exposed (30.4% service revenue in 2024). Given how telco enterprise spend as % of GDP is under indexed to developed market peers, we stay confident of the structural digitalisation trend in China.

EBITDA pulled back by higher staff costs, bottom line higher on lower D&A and tax costs. EBITDA was weaker however on higher staff costs as it channelled more investments towards its sci-tech development in both AI and computing; down 4.4% YoY from +6% prior. Despite this, China Telecom was the only operator to register EBITDA growth in 2024 (+2.9% YoY versus CM -2.3% and CU -0.4%). Earnings accelerated to 11% YoY from 7.8% YoY, benefiting from lower D&A and tax.

Stable ARPU and net additions. Mobile ARPU was up 1.8% YoY in 4Q24 and up 0.4% for the full year. Broadband ARPU remains flat. 5G penetration rose to 82.8% on a mobile subscriber base of 424.5m. On broadband, it gained another 1.2m users to reach 197.4m customers. The company seeks to promote AI applications such as AI assistants and home intelligence to stabilise both mobile and broadband ARPU in 2025.

Conclusion

As with peers, Q4 was overall better with improvement at the service revenue and bottom-line level. In our view, the blip in EBITDA was a function of investments into AI infrastructure which we think should generate decent returns. Shareholder remuneration was as expected and on our 2025 dividend estimates, the stock yields 5.2%. China Telecom has had a good run YTD in anticipation of the computing needs as China implements AI on a large scale. Although its valuation is not as compelling before, we stay Buyers with a HK$ 8.75 price target with its improving shareholder remuneration policy and we see China Telecom as a key beneficiary of the AI revolution in China.