THE BROAD VIEW
With China’s mobile penetration rate at around 40%, analysts expect this segment of the telcom industry to exhibit robust growth for at least another five years.
CHINA MOBILE (0941.HK)
Parent: China Mobile Communications Corp
Business scope: Operates the world’s largest GSM network
Subscribers (Jan 31): Over 376 million (GSM)
2006 net profits*: Up 23.3% to US$9.3 billion
Analyst take: Nobody expects this mobile behemoth’s dominance to end anytime soon
China Mobile claims it snapped up around 7 million of the 8 million or so new mobile subscribers in China during January. While the firm may face future competition from the two new telecom entities in attracting subscribers, Morgan Stanley believes China Mobile’s current user base will remain intact, as its revenue dominance is sustainable for the long term.
It is generally accepted that China Mobile will be asked to operate a TD-SCDMA network, and some suggest that the firm may still resist being stuck with the least mature 3G standard.
However, Fang Meiqin, an analyst at Beijing-based media, tech and telecom consultancy BDA China, believes the most likely outcome is a compromise that will insulate China Mobile against any losses arising from TD-SCDMA. Brokrage Cazenove estimates that by 2017 China Mobile will still control 52% share of the country’s wireless market, down from around 67% in 2007. It remains the safe bet in China’s telecoms industry.
CHINA UNICOM (0762.HK)
Parent: China United Telecommunications Corp
Business scope: Operates two mobile networks, running on GSM and CDMA
Subscribers (Jan 31): 121.7 million (GSM) and 42.2 million (CDMA)
2006 net profits*: Down 24% to US$524.7 million. This was primarily due to a non-cash loss of US$337.6 million
Analyst take: Unicom’s two networks have been a millstone around its neck. With a breakup likely, some analysts see the firm as a savvy restructuring play
Expectations of industry restructuring saw shares in China Unicom rise by 25% between mid-November and mid-February, a period during which the Hang Seng Index fell by 17%.
ABN AMRO said Unicom was its top restructuring, pick as it expects Unicom’s parent company to inject US$5.2 billion into the listed arm in order to improve its GSM business. Cazenove adds that, although Unicom’s CDMA network is viewed as a distressed asset and its GSM network poorly run, these networks could be sold off at a 20% premium (to China Telecom and China Netcom respectively). Cazenove believes that improvements to China Unicom’s GSM and CDMA services would boost the future selling prices of these networks.
Others suggest caution, however. With an estimated 2007 price-to-earnings ratio of 30, HSBC believes the market has already priced in any benefits of a restructuring into the stock.
THE BROAD VIEW
The fixed-line carriers’ core business is shrinking. In January fixed-line users decreased by 0.2 million to 280.7 million, the fifth consecutive month of negative growth, according to the Ministry of Information Industry.
CHINA TELECOM (0728.HK)
Parent: China Telecommunications Corp
Business Scope: Fixed-line, personal handy-phone and wireless broadband services; dominant in southern China
Subscribers (Jan 31): 219.1 million (fixed-line) and 36.3 million (broadband)
2006 net profits*: Down 2.8% to US$ 3.8 billion
Analyst take: Among the fixed-line operators, China Telecom stands to gain the most from an industry restructuring. But don’t expect an impact on the bottom line any time soon
China Telecom is expected to be an effective caretaker of the CDMA network, with ABN AMRO predicting much improved subscriber growth. However, these networks are difficult to run profitably in emerging telecom markets, which would pose problems as the firm tries to snag new subscribers from rural areas.
According to HSBC, the best case scenario for China Telecom in terms of industry restructuring is for 80% of its 60 million personal handyphone (PHS) subscribers migrating to CDMA. But even if this happens HSBC doesn’t think it would deliver “an immediate improvement to the bottom line.”
Cazenove expects China Telecom to remain primarily a fixed-line operator for the foreseeable future. The brokerage predicts that, by 2017, China Telecom will hold around two-thirds of the country’s fixed-line market and 23% of its mobile market.
China Telecom’s price-to-earnings ratio of 24 suggests the market is unrealistically enthusiastic about the stock, Cazenove added.
CHINA NETCOM (0906.HK)
Parent: China Network Communications Group
Business Scope: Fixed-line, personal handy-phone and wireless broadband services; dominant in northern China
Subscribers (Jan 31): 110 million (fixed-line) and 20.53 million (broadband)
2006 net profits*: Down 6.7% to US$1.8 billion
Analyst take: Another long-term beneficiary of restructuring, but has the weakest brand name and balance sheet in the industry.
Of all the listed telcom firms, China Netcom’s post-restructuring future is the murkiest. The firm will likely face difficulties in integrating with China Unicom’s GSM business, according to ABN AMRO. But the relative ease of operating a GSM network over a CDMA network bodes well in the company’s long term.
Netcom has also been developing its broadband business more aggressively than China Telecom, and may ultimately find growth opportunities with Internet Protocol Television.
Cazenove expects China Netcom to hold one-third of the fixed-line market and 24% of the mobile market by 2017.