Profit still fell nearly 15%: where is the operational improvement?

  • China Telecom’s net profit in the third quarter of 2026 was 6.619 billion yuan, down 14.7% year on year and approximately 3% below the market consensus of 6.846 billion yuan; service revenue was 115.2 billion yuan, down 1.5% year on year. JPMorgan believes overall results were broadly in line with market consensus.
  • The improvement was mainly reflected in narrower year-on-year declines: the decline in service revenue narrowed from 2.6% in the second quarter to 1.5%, while the decline in operating profit narrowed from 16.7% to 14.1%. This indicates that the downturn eased, although revenue and profit have yet to return to year-on-year growth.
  • JPMorgan noted that, excluding the impact of VAT item adjustments, operating revenue was broadly stable on a comparable basis and profit attributable to shareholders maintained robust growth. The bank therefore attributes the decline in reported profit more to tax effects than to a marked deterioration in underlying operations.

Why does cash flow provide stronger support for dividends than reported profit?

  • Operating cash flow for the first three quarters of 2026 was 98.4 billion yuan, up 12.6% year on year; capital expenditure over the same period was 44 billion yuan, down 1.9% year on year. Higher cash inflows and lower investment spending provide stronger support for funding arrangements and future dividends.
  • The company’s full-year capital expenditure guidance is 73 billion yuan, down 9% year on year. JPMorgan therefore considers its investment discipline sound. However, the actual decline in the first three quarters was smaller than the decline implied by full-year guidance, so full-year spending control remains an important condition for this cash-flow thesis.

What business and cost changes will drive a return to profit growth in 2027?

  • JPMorgan expects full-year profit in 2026 to fall 14% year on year, affected by changes in VAT policy and declining revenue from traditional telecom services, before rising 7% in 2027 and 8% in 2028. The path back to growth includes expansion of intelligent businesses, lower depreciation following reduced capital expenditure, and optimisation of operating expenses.
  • China Telecom ranks first among the three major operators both in the scale of its cloud revenue and in the share of revenue generated by cloud, and therefore benefits more directly from enterprise cloud and AI demand. The bank believes continued expansion of AI applications in China could increase demand for operators’ cloud services and AI data centres and support higher valuations.
  • This business growth path depends on the continued development of AI services and enterprises’ willingness to purchase them. JPMorgan also notes that insufficient innovation in AI services could slow cloud revenue growth, while a weak macroeconomy could restrain corporate AI and cloud spending.

Overweight maintained: why does the bank still prefer China Mobile H-shares?

  • JPMorgan maintains its Overweight ratings on China Telecom’s A-shares and H-shares, with respective year-end 2027 price targets of 7.00 yuan and 5.20 Hong Kong dollars. Based on the bank’s 2026 dividend forecasts and share prices at the time of the report, the dividend yields are 3.8% for A-shares and 6.2% for H-shares, so it prefers H-shares between the two classes of China Telecom shares.
  • The price targets use a dividend valuation framework: H-shares are valued using a forecast 2027 dividend per share of 0.30 Hong Kong dollars and a forward dividend yield of 5.7%; the corresponding figures for A-shares are 0.25 yuan per share and a forward dividend yield of 3.6%.
  • Among operators, the bank prefers China Mobile H-shares because its 2026 earnings are more resilient and its forecast dividend yield of 7.0% exceeds China Telecom H-shares’ 6.2%. China Telecom’s cash-flow advantage supports the Overweight rating, but its earnings performance and dividend returns still lag on a relative basis.