China's Dueling Wireless Players


By David So The two major players in the world's largest wireless services market are China Mobile (CHL

; ranked 4 STARS, or buy; recent price: $17) and China Unicom (CHU

; 3 STARS, or hold; $8). Listed on the Stock Exchange of Hong Kong and the New York Stock Exchange in October, 1997, China Mobile has 64% market share in mainland China. The stock is 76%-owned by China Mobile (Hong Kong) Group, which belongs to the state-owned Assets Supervision & Administration Commission. An index heavyweight, China Mobile represents 11% of the Hang Seng Index, the second-largest percentage, behind HSBC (HBC), which has 33%.

China Mobile's smaller rival, China Unicom, captures the market's remaining 36%. Apart from its GSM and CDMA wireless networks, China Unicom owns a fiber backbone that provides long-distance and Internet/data services. Unicom is 63%-owned by China United Telecommunications, which also belongs to the Assets Supervision & Administration Commission and was listed on the Stock Exchange of Hong Kong and the NYSE in June, 2000.

RISING CONSUMER INCOMES. As the dominant player in the universe's biggest mobile market, China Mobile can tap into a relatively unsaturated potential customer base with significant room for growth, in Standard & Poor's view. That said, we also believe mobile competition is increasing -- although prices have stabilized -- as fixed-line operators aim to provide mobile services in addition to their limited-range wireless personal access system (PAS) offerings. In particular, we think fixed-line telecom services provider China Netcom (CN

; $27) could capitalize on the wireless market through a new mobile license and/or could acquire a mobile network.

However, we believe China Mobile has plenty of room for subscriber growth, as it's driven more by the expansion of the second-generation and third-generation (3G) technologies rather than by taking customers from China Unicom. With personal incomes on the rise in mainland China, we think mobile subscribers will grow at the expense of the fixed-line operators' PAS customer base, given the latter's technological limitations and the migration of strategies to 3G from PAS this year and beyond.

As for China Unicom, we believe its outlook depends mainly on the degree of industry consolidation and restructuring -- largely based on the number of 3G licenses Beijing issues -- that could take place in the next 12 to 18 months. Indeed, much speculation surrounds the potential disposal of one or both of Unicom's wireless networks to the fixed-line carriers (who have expressed interest in them) for the government to rationalize the telecom industry. We see these potential events as positive catalysts that could drive the stock price higher.

LICENSE REFUSED? Based on Unicom's current price of around $8, we believe the market is valuing the wireless networks close to book value. Given that transactions involving state-owned assets cannot be sold below book value, we believe the potential disposal of any of the wireless assets (possibly as a condition to receive a 3G license) is likely to be incrementally positive to the prevailing stock price.

Alternatively, if Unicom receives a 3G license without the requirement by the regulators of selling any of its wireless network, then this would remove a major overhang that has been dragging on its stock price, in our opinion.

Apart from the two scenarios highlighted above, another possibility exists: that Unicom won't receive a 3G license and, at the same time, be required to sell its two wireless networks to China Netcom, which is the potential buyer of the CDMA network, and China Telecom (CHA

; 3 STARS, or hold; $36), which is speculated to be interested in the GSM network. If this happens, we believe these assets are likely to sell at 20% or more above book value. This move would, in our view, drive the stock price higher.

BUY VS. HOLD. We believe valuations for China Mobile are attractive, with the stock trading at a price-earnings ratio of 11.3, enterprise value (EV)-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4, and a dividend yield of 2.8%, for 2005. China Unicom has a p-e of 17.3, EV/EBITDA of 4.7, and a dividend yield of 1.9%. In our view, China Mobile's strong free cash-flow generation could allow it to comfortably absorb its 3G capital expenditures and also let it enhance value by redistributing cash to shareholders in a higher dividend payout.

Therefore, we have a buy recommendation on China Mobile and a hold opinion on China Unicom. We believe the consolidation and/or restructuring of China's telecom industry would be the main catalyst that could potentially drive up Unicom's share price.

Required Disclosures

In the U.S.: As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

In Europe: As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.

In Asia: As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.

Globally: As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.

S&P and/or one of its affiliates has performed services for and received compensation from CHL during the past 12 months.

CHU and CHA are not customers of S&P or its affiliates.

Disclaimers

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Analyst So follows telecommunications and technology stocks for Standard & Poors Equity Research in Hong Kong and Beijing


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