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Medium Profitability Financial Modeling

Qinghai Telecom

#IT #Telecom
ProHub Comment

This case tests financial modeling and profitability analysis by requiring candidates to evaluate three cable technology options with different cost structures and adoption rates. The challenge lies in building a coherent framework to compare investment returns (ROI) rather than just NPV, and recognizing that the 50-50 cost and revenue split has no impact on the final recommendation. A mid-case prompt introduces a fourth option (fiber optics), adding complexity around timing and discount rates.

Estimated Time 15 minutes
Difficulty Medium
Source HKUST
50 / 100
Our client is a local land developer in Xining, the capital of Qinghai province in western China. The latest project is a residential complex in a relatively affluent area where the client has partnered with Qinghai Telecom, a local affiliate of a national telecom conglomerate that has offered to provide cables into each residential unit for providing internet access. Residents of the complex would thus be “locked” into becoming customers for Qinghai Telecom. Our client and Qinghai Telecom have agreed to evenly split both the costs of cable installation and the revenues of the internet service. Qinghai Telecom is willing to provide different types of cables to install, each that provides different quality service. Our client wants to ensure they invest their capital wisely. Which type of cable should our client pick?

Clarifying Information

Cable choices:

  1. Twisted pair: Data transmissions speeds of up to 1 gigabits per second. Most economical choice.
  2. Coaxial cable: Data transmission speeds of up to 80 gigabits per second. Highest performance choice.
  3. Installation time for all choices are negligible, but the whole complex must use the same type of cable.

Residents:

  1. There are 500 residential units in the complex.
  2. All residents have an assigned hukou and are unlikely to move out.
  3. Although the partnership ensures there are no competitors for landline connections, adoption is not 100% guaranteed; residents that are dissatisfied with the service (either too expensive or too slow) can choose not to register and instead access internet by simply tethering off their smartphone plans instead.

Internet plans:

  1. As residents are “locked in”, all units that register are charged a flat fee for the whole year at the beginning of the year for unlimited use.
  2. If twisted pair cables are used, fee would be 4500 RMB / unit / year.
  3. If coaxial cables are used, fee would be 8500 RMB / unit / year.
  4. Assume 500 RMB / unit / year variable cost regardless of type.

Registration rate:

  1. If twisted pair cables used, 50% of residents will register.
  2. If coaxial cables used, 75% of residents will register.

Installation costs:

  1. Installing twisted pair cables in the building will cost 2 million RMB.
  2. Installing coaxial cables in the building will cost 5 million RMB.
  3. The bank will help structure financing to attain 10% cost of capital.