Is this the year for Chinese telecom stocks to sparkle?

Includes: CHA, CHL, CHU, KZ, LTON
by: Ezra Marbach

According to an article in The Wall Street Journal (subscription required), the Chinese telecom sector is about to change. Investors have been wary of Chinese telecom stocks for years because despite high growth in Chinese phone usage, many companies have failed to generate high returns.

The Chinese government, however, is expected to change the telecom landscape by......

both issuing third-generation (3G) mobile operating licenses in 2005
or early 2006, and introducing laws governing telecom companies.

Of course, the government hasn't specified:

  • When 3G licenses will be issued
  • How many will be awarded
  • Which of three possible 3G technologies, China will adopt.

These issues do not seem to deter some analysts:

  • CSFB expects great things from fixed-line operators
    who will enter China's still fast-growing mobile-services market following
    the issuance of 3G licenses
  • ABN Amro believes that any further delays would limit the
    possiblity that China can showcase a high-speed network by the 2008
    Olympic Games. So issuance will undoubtedly happen soon.

Who will be the recipients of 3G licenses? Conensus is.....

  • China Netcom - a fixed-line carrier with a dominant position in northern China
  • China Telecom - the main fixed-line carrier in southern China
  • China Mobile - a mobile operator
  • China Unicom - a mobile operator

Some fund managers surveyed are skeptical. Comments include:

  • 3G looks to be particularly ambitious right now given that a lot of telecom companies have yet to deliver returns
  • 3G could be more appealing to China investors if the rollout there
    is restricted to urban areas with the high density and penetration that
    could support the technology
  • While the stocks, especially of fixed-line companies, have relatively attractive valuations, investors want to see higher dividends.

Quick thought: Reports are circulating around China that 3G licenses could be issued as early as March. And the ABN Amro analyst has a point. The Olympics are China's chance to showcase its abilities and technologies to the world. The more time they have to experiment and perfect the system in China, the better. With so many wireless value added service providers waiting for 3G to take hold, the government had best consider the long term prospects of 3G and the value of issuing licenses as soon as possible.