Global Economics

China's Telecom Restructuring


Reducing China Mobile's dominance should result in more competition, better services, and lower prices in the largest mobile phone market in the world

Many observers are in two minds about the latest round of telecom restructuring in China announced last week. While there is recognition as to the benefits of more competition, the financial losses suffered by China Mobile shareholders, and the use of government fiat to carry out the restructuring, is causing plenty of raised eyebrows.

The Chinese government's approach transcends shareholders' concerns with short-term financial returns and is clearly aimed at reining in a market operator that has had too much power, for too long. For a long time, China Mobile's shareholders have benefited immensely, but at the expense of the broader market. The changes should result in more competition, better services and lower prices for the largest mobile phone market in the world.

China Mobile is a gargantuan enterprise, and as the principal mobile phone player, it has essentially had a license to print money. It dwarfs the other mobile and landline players: China Mobile's 2007 turnover was 3.6 times China Unicom's (the mobile phone provider supposedly acting as China Mobile's competitor), 4.3 times China Netcom's (the fixed-line and internet supplier in the north of the country) and 2 times that of China Telecom (which provides fixed-line and internet services to the southern part of the country.) And it's not just the top line. China Mobile is also very profitable compared to its Chinese peers, with a return-on-equity (ROE) of 25%, compared to China Unicom's 11.5%, China Netcom's 15%, and 11% for China Telecom. Nor has that impressive ROE been built on a mountain of debt. Debt-to-common-equity ratios show China Mobile on 9.5 times; China Unicom on 3.97 times; China Telecom on 47.6 times; and China Netcom on 65 times.

In other words, China Mobile has benefited enormously from its dominant position—as have its shareholders. China Mobile's share price has moved up in an almost unbroken line since its 2002 listing at HK$20 to its current level of HK$115.

So it's not too surprising that rivals and regulators are now kicking up a fuss. The fixed-line players don't have mobile phone licenses in a global environment where voice and data services have long been converging on to mobile phone platforms. The problem is especially acute in China because a new generation of young people and rural users is jumping straight to the mobile phone, and ignoring landlines completely. As a result, the growth figures of China Telecom and China Netcom make dispiriting reading for their managers and shareholders. For China Netcom, earnings per share (EPS) dropped 1.15% in 2007 and at China Telecom they are down 15%. In contrast, the mobile phone players are doing much better. China Mobile's EPS was up 31% last year, while China Unicom's EPS went up 136%—even though China Unicom has been held back by running two different mobile phone standards.

So, now it appears that the government has clipped China Mobile's wings. Analysts' views about the action are somewhat mixed, however. JPMorgan has forecast a negative effect on China Mobile's share price caused by the 'asymmetrical regulations'. This term is borrowed from the Korean market, where the government has carried out similar anti-monopoly policies and refers to the powerful incumbent being forced to slow growth—through caps on market share, for example.

But surprisingly, very few analysts have put a 'sell' on China Mobile. A quick look (as of May 30) at 28 leading Hong Kong analysts' recommendations posted on Bloomberg shows just one having a sell call: Helen Zhu of Goldman Sachs. That could mean the government will have to do more. Zhu puts a HK$105 discounted cash flow-based 12-month price target on the stock. The price prior to the news was HK$125, and the share price touched HK$160 late last year, despite the credit crunch.

Clearly, the effort to level the playing field by the three regulators—the Ministry of Industries and Information (MII), the National Development and Reform Commission (NDRC) and the Ministry of Finance—are laudable.


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