S&P on China mobile stocks

 |  Includes: CHL, CHU
by: Ezra Marbach

S&P Hong Kong analyst David So provides analysis of Chinese wireless operators China Mobile (ticker: CHL) and China Unicom (ticker: CHU). Here are the key points, and stock recommendations:

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.
  • Has 64%
    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.
  • China Mobile
    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.
  • Has 36%
    market share in mainland China.
  • Operates GSM and CDMA wireless networks.
  • Owns a fiber backbone that provides long-distance and
    Internet/data services.
  • Stock is 62.9%-owned by China United
    Telecommunications, which also belongs to the Assets Supervision &
    Administration Commission.

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
    stock price.
  • 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.

China Mobile's Stock Market Performance:

China Unicom's Stock Market Performance: