China Telecom’s third-quarter profit falls nearly 15%: incentive expenses weigh on earnings; BofA maintains Buy on H shares
Excluding the impact of VAT reform, China Telecom’s service revenue was broadly flat in the first nine months; however, higher personnel costs in the third quarter offset some of the savings. BofA remains positive on the core telecommunications business and monetization of cloud and AI, maintaining Buy on the H shares and Neutral on the more fully valued A shares.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
China Telecom’s revenue is affected by VAT reform, while earnings also face pressure from higher incentive expenses. BofA’s Buy rating on the H shares rests on the core telecommunications business, cloud and AI monetization, and a more attractive valuation relative to the A shares.
Revenue is falling, but is the core business shrinking too?
China Telecom’s operating revenue in the third quarter of 2026 was approximately 122 billion yuan, down 2.9% year on year. Service revenue was 115.2 billion yuan, down 1.7% year on year. Service revenue for the first nine months was 359.3 billion yuan, down 2.1% year on year, but BofA noted that it was broadly flat excluding the impact of VAT reform. The reported decline therefore needs to be considered separately from business performance.
Revenue pressure also came from sales of goods and other revenue: the category generated approximately 6.7 billion yuan in the third quarter, down 19.3% year on year, substantially weaker than service revenue.
The subscriber base continued to grow, but net additions differed markedly between mobile and broadband. Mobile subscribers increased by a net 2.84 million to 445.3 million in the third quarter; 5G network subscribers increased by a net 7.89 million, with penetration reaching 74%. Fixed broadband subscribers increased by a net 210 thousand to 201.5 million.
Why did net profit fall nearly 15% when revenue fell about 3%?
Cost savings did not fully offset the combined pressure from revenue and personnel costs. Third-quarter network operations and support expenses fell 11.0% year on year, and selling and administrative expenses fell 10.1%; personnel costs, however, rose 11.5%, which BofA attributed mainly to increased incentives.
Third-quarter EBITDA was 33.7 billion yuan, down 3.9% year on year, and the margin fell to 27.6%, a decline of 0.3 percentage points year on year. Operating profit fell 14.1% to 7.9 billion yuan. Depreciation and amortization were approximately 25.8 billion yuan, broadly flat with approximately 25.9 billion yuan a year earlier; as EBITDA fell, operating profit therefore suffered a larger percentage decline.
Third-quarter net profit was approximately 6.6 billion yuan, down 14.7% year on year, a steeper decline than the 13.5% fall in the second quarter. Excluding non-recurring items consisting mainly of government subsidies and other non-operating income, adjusted net profit was 5.8 billion yuan, down 17.0% year on year, indicating more pronounced pressure on earnings.
How quickly can cloud and AI take over as growth drivers?
The business mix has shifted slightly: third-quarter intelligent services revenue was 15.1 billion yuan, accounting for 13.1% of service revenue, up from 12.7% in the first half; telecommunications services still accounted for 86.9%. New businesses have increased their share, but telecommunications remains the main source of revenue.
BofA is positive on the cloud and AI data-center capabilities built through years of investment and believes monetization of AI platforms and applications can support earnings growth. Its model forecasts adjusted net profit will fall 12.2% year on year in 2026, then grow 4.1% in 2027 and 6.5% in 2028, respectively, implying a gradual recovery.
That path depends on Tianyi Cloud’s growth, enterprise investment in digitalization, and the pace of adoption of cloud and AI services. BofA also lists downside factors including weak government and enterprise IT spending and intensifying competition in cloud and AI, which would directly affect the strength of new-business monetization.
Same company: why Buy on the H shares and Neutral on the A shares?
BofA maintains Buy on China Telecom’s H shares with a target price of 6 Hong Kong dollars, and Neutral on its A shares with a target price of 7.2 yuan. Both ratings share the same operating thesis for telecommunications, cloud and AI; the main difference is that BofA considers the A shares already relatively fully valued.
The H-share target price is the average of discounted cash flow and EV/EBITDA valuations. The latter uses 2.6 times estimated 2027 EBITDA, in line with the average forward multiple over the past year. The A-share target price applies an A/H valuation premium of 40% to the H-share target price, taking the exchange rate into account.
