China's wireless services market is dominated by China Mobile and China Unicom.
China Mobile (ticker: CHL):
- IPO on Hong Kong Stock Exchange and NYSE in October 1997.
market share in mainland China.
Stock is 76%-owned by China Mobile
(Hong Kong) Group, which belongs to the state-owned Assets Supervision
& Administration Commission.
represents 11% of the Hang Seng Index (HSI), behind only HSBC (ticker: HBC) at 33%.
China Unicom (ticker: CHU):
- IPO on Hong Kong Stock Exchange and NYSE in June 2000.
market share in mainland China.
- Operates GSM and CDMA wireless networks.
Owns a fiber backbone that provides long-distance and
Stock is 62.9%-owned by China United
Telecommunications, which also belongs to the Assets Supervision &
S&P's Market Overview:
- Unsaturated mobile market with significant
room for growth.
- BUT - Mobile competition is increasing.
- Fixed-line operators are aiming to provide mobile services in
addition to their limited-range wireless personal access system (PAS)
- 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.
- Fixed-line telecom services provider
China Netcom (ticker: CN) could capitalize on the wireless market through a new mobile license and/or could acquire a mobile network.
On China Mobile's Potential:
- China Mobile has plenty of room for subscriber
- Expansion driven by growth of the second-generation
(2G) and third-generation (3G) technologies - NOT by taking customers
from China Unicom.
On China Mobile's Valuation:
- S&P believes China Mobile valuation is attractive.
- The stock is trading at a P/E
ratio of 11.3, EV/EBITDA of 4, and a dividend
yield of 2.8% for 2005.
- S&P believes that China Mobile's strong
free cash-flow generation could allow it to comfortably absorb its 3G
capital expenditures, and pay a higher dividend to shareholders.
On China Unicom's Potential:
- Outlook depends mainly on
the degree of industry consolidation and restructuring, and the number of 3G licenses issued by the Chinese government.
- The government is considering a plan to have Unicom dispose of one or more of its networks to China's fixed-line carriers.
- S&P sees these potential
events as positive catalysts that could drive the stock price higher.
On China Unicom's Valuation and Possible Stock Implications:
- China Unicom has a P/E of 17.3, EV/EBITDA of
4.7, and a dividend yield of 1.9% for 2005.
- Based on Unicom's current
price of around $8, the market is valuing the wireless
networks close to book value.
- Transactions involving
state-owned assets cannot be sold below book value. So a
potential disposal of any of the wireless assets (possibly as a
condition to receive a 3G license) is likely good news for the stock.
- Alternatively, if Unicom receives a 3G license without being forced to sell any of its wireless networks,
then this would remove a major overhang that has been dragging on its
- Another possibility: Unicom won't receive a 3G license, and, at the
same time, is required to sell its wireless networks to China
Netcom, which uses CDMA technology, and China Telecom (ticker: CHA), which uses GSM technology.
- If this happens, S&P believes the assets could sell for at least 20% or more above book
- Buy recommendation on China Mobile.
- Hold recommendation on China Unicom - BUT consolidation and/or
restructuring of China's telecom industry could propel Unicom's stock price.