China Telecom: Strong Growth Expected Despite Mediocre 2007 Results

China Netcom Group Corporation (CN) announced mediocre results for 2007 due to competition from Chinese mobile operators. However, China Netcom is a major player in fixed-line phone services in one of the world's fastest growing telecom markets.

Its attractive long-term prospects arise from growth in broadband, value-added services, and potential 3G services. Moreover, China Netcom is expected to benefit from the possible telecom restructuring in China and issuances of 3G licenses in China.

On Mar 25, 2008, China Netcom announced its annual results for 2007. Excluding amortization of upfront connection fees, revenue from continuing operations rose 0.9% to RMB82,488 million. Consolidated net profit was RMB10,578 million, and basic earnings per share were RMB1.59 ($4.35 per ADS). The Board of Directors recommends a final dividend of HKD 0.592 per share ($1.52 per ADS), up 7.1% from that of the previous year.

Based on our 2008 earnings per ADR estimate, the stock is trading at 13.8x, which is below the industry average and its Chinese peers. Based on our estimate for fiscal year 2009 earnings per ADR, the stock is trading at 13.9x, which is also below the industry average. Using a P/E multiple of 14.5x our fiscal year 2009 earnings per ADR estimate yields a six-month target price of $59.50, which we believe reflects the company's prospects. Thus, we are maintaining our Hold rating on the stock.