China Mobile Expected To Outpace Unicom In 2006 Earnings

HONG KONG -(Dow Jones)- China's telecommunications boom is expected to lift profits for mobile phone operators, but China Mobile's rising subscriber base and stable margins should keep its earnings growth well above those at smaller rival China Unicom.

China Mobile reports full-year 2006 results Wednesday, while China Unicom reports March 29.

Seven analysts polled by Dow Jones Newswires on average forecast net profit of CNY66.42 billion at China Mobile for 2006, a 24% increase from CNY53.55 billion a year earlier.

Nomura Asian Equity Research analyst Kelvin Ho forecast a 26% profit growth at China Mobile on stronger subscriber growth, firmer average revenue per user - a key measure of success in the industry - and a fatter margin for earnings before interest, taxes, depreciation and amortization.

But Ho said China Mobile will face increasing competition due to industry restructuring and that he expects EBITDA margins to come under some pressure in 2008.

Five analysts polled by Dow Jones expect China Unicom to report 16.8% profit growth in 2006 due to better cost management. The analysts put China Unicom's net profit for the year at CNY5.76 billion, up from CNY4.93 billion in 2005.

Analysts said they believe China Unicom will be held back by charges of CNY2.2 billion to CNY2.3 billion from a non-cash loss on convertible bonds.

China Unicom in July issued a US$1 billion zero coupon convertible bond to South Korea's SK Telecom Co. at par for a period of three years with a conversion price of HK$8.63 a share.

The fair value of the embedded call option in the convertible bond fluctuates with China Unicom's share price. From July 5, when the bond was issued, to Dec. 31, the company's share price price rose to HK$11.4 a share from HK$7.0 a share.

Merrill Lynch Research Analyst Wendy Liu estimated the non-cash after-tax loss due to the rising liability related to the option's value to be approximately CNY2.2 billion.

Excluding the convertible bond loss, Liu raised China Unicom's full-year net profit forecast to CNY6.05 billion from CNY5.90 billion, a 22.7% rise, on lower-than-expected Code Division Multiple Access sales and marketing expenses.

But Goldman Sachs Group said it believes China Unicom's results will be disappointing.

"It will show not only lackluster trends but also capex hikes for 2007 with no corresponding increase in revenue estimates," Goldman analyst Helen Zhu said in a research report.

China Unicom's price has been propped up by speculation of a government-driven splitup of the company's assets, which could give it a big premium for selling one of its networks. But Zhu said such hopes have been lingering for three years with no results.

China's 3G licenses were originally expected to be issued this year, but because of several delays, analysts are anticipating the licenses will be issued no earlier than 2008. A telecom industry restructuring will change the competitive environment, they say.

-By Lorraine Luk, Dow Jones Newswires; 852-28322334; lorraine.luk@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 19th March 2007