THIS WEEK IN CHINA: Mainland Telecom Stocks in Focus This Week
Published on: 23rd Mar 2008
Note -- this news article is more than a year old.
HONG KONG (Dow Jones) Mainland telecoms will be in focus this week, with the remaining three big companies in China lining up to report financial results in the wake of China Mobile's strong results a week ago.
Hutchison Whampoa's results will also have a strong telecom flavor, with speculation that a long-awaited turnaround at its European mobile operations called "3" could justify an upgrade.
Liquidity flows and big macro concerns have meant little attention has been paid to individual stock fundamentals recently. But as the recent sell-off has also hit those companies capable of riding out the chill economic headwinds and tougher credit conditions, it could throw up some value.
Into this category go telecoms, say some strategists who are touting their defensive qualities and reliable earnings. In the Internet bubble in 2001, they certainly provided little shelter, even where earnings held up fairly well. Will it be different this time around?
It can be argued the telecom sector has now assumed such an important role in the mainland economy, its earnings have a utility-like dependability.
Not only is the mobile phone the primary -- or only -- phone line of many consumers, it increasingly also will be their main Web access device. And who in China could do without their text message? China Mobile handled an incredible 502 billion SMS messages last year.
All this means spending in this sector should be one of the last to slow if consumers tighten their purse strings.
One impressive factor of China Mobile's results was how its average revenue per user, or ARPU, held up at Rmb89 ($12.56) a month, despite more than half of new customers last year coming from the low-income rural countryside. A quarter of revenue now comes from value-added services.
In earlier years investors were spooked as new subscribers often were accompanied by steep declines in ARPU.
Then there is the costs side of the equation to consider. Telecom operators are benefiting from the fierce competition in the vendor space which is seeing hardware costs continue to fall.
This means we are less likely to see earnings squeezed by nasty inflation surprises to costs.
Another plus is the strong cash flow, especially for companies like China Mobile that now has built out much of its network. Deep pockets will be handy for bargain hunting in distressed equity markets.
A handy prop to valuations in uncertain markets is merger activity in the sector. A restructuring in the mainland telecom sector has been widely flagged, possibly after the Beijing Olympics. This has had investors scratching their heads for years now, but it should help crystallize value in the sector.
For one, it should highlight the value of the smaller mobile player China Unicom which runs both a CDMA and GSM mobile network.
In the hands of one of the fixed line operators -- China Netcom or China Telecom -- the value of those networks would surely increase.
Most attention has been focused on domestic players merging, but watch out for some foreign interest appearing. We are not talking about new licenses, but the ability to buy bigger chunks than the single digits held by Vodafone, Hutchison Whampoa and Telefonica.
Much like in developed telecom markets, the defensive arguments are stronger for the mobile operators who have been picking off the fixed line operators' customers in increasing numbers.
But after restructuring it is expected there will only be three combined wireline and wireless operators, so such a distinction is removed even if China Mobile is still the giant on the playing field. The main caveat remains how authorities implement restructuring and whether there will be any nasty regulatory surprises.
Along with Unicom results Thursday, Li Ka-shing's Hutchison Whampoa group reports, which is always interesting.
Credit Suisse say we should look for evidence mobile operator "3" turned EBITDA-positive in the second half of 2007. That could remove one of the key overhangs on the company. Even Managing Director Canning Fok's fiercest critics might wish he could put this one to bed, as he has been batting the question back to analysts and media for at least five years now. The greenfield 3G in Europe has been a huge cash drain and probably did much to persuade China to put on hold its own 3G plans.
This year the earning's gap was plugged by sale of its Indian operations to Vodafone. The group's ability to trade its way out of a tight spot and create value should not be discounted.
What might be interesting is whether Hutchison can parlay any improvement in "3" into an M&A deal, especially with the euro now riding at all-time highs. Or could Hutchison maneuver to get a bigger slice of the China market? This will be interesting to watch and could be one to consider for speculative bottom-fishing.
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