China Telecom Restructuring Likely to Happen this Year

Includes: CHA, CHL, CHU, CN-OLD
by: Interfax-China

The restructuring of China's telecom industry is likely to happen this year due to several factors, including China Unicom's (NYSE:CHU)  willingness to sell its CDMA network and the need to accelerate the growth of China's broadband market, an analyst with an investment group said today at a conference.

"Previously, China Unicom was unwilling to sell its CDMA network. Now China Unicom is willing to sell, because its business is not going very well. They grew their revenues by only 4 percent in 2007," Francis Cheung, head of CLSA Asia-Pacific Markets' [CLSA] Asian telecom research, said at the CLSA China Forum 2008 in Shanghai.

In 2007, China Netcom (CN-OLD) recorded negative year-on-year revenue growth, while China Telecom (NYSE:CHA) recorded a 3 percent year-on-year revenue growth, Cheung said. China Telecom and China Netcom are the dominant fixed-line operators in China.

By comparison, China Mobile (NYSE:CHL), the largest mobile operator in China, recorded a 20 percent year-on-year growth in revenue for 2007.

As can be seen from the operators' performance, the fixed-line business is declining in China. The government aims to save fixed-line operators by letting them operate integrated services, including mobile, fixed-line, broadband and TV services, Cheung said.

Cheung also pointed out that the mobile market is maturing in China, while broadband penetration is still relatively low. In order to accelerate the growth of the broadband market, more integrated operators need to be created, he said.

"The penetration rate for mobile phones is now at 42 percent in China, and the country is adding 9 million mobile subscribers per month. At this rate, the penetration rate for mobile phones will reach approximately 70 percent by 2010. By 2010, investment in mobile infrastructure will pretty much be done," Cheung said.

The broadband subscriber base in China, on the other hand, is now growing at approximately 1.3 million to 1.4 million per month, almost the same rate as three years ago, he said.

In order to expand broadband services to the entire country, the government needs to engage China Mobile in infrastructure construction because China Mobile has the most money, he said.

"The risk of telecom restructuring is low this year because China Mobile is so strong that a restructuring will not greatly change the competition landscape in China," he said.

Commenting on a rumor that a telecom restructuring plan will be announced on May 17, Cheung said that there is a 35 percent chance that the plan is announced at that time.

"We still think that restructuring may be delayed until after the Olympic Games. Restructuring is quite difficult to execute and the government is now busy with many things, such as earthquake rescue operations and the Olympic Games," he said.

A widely quoted rumor stated that China Mobile will merge with China Tietong, and China Unicom will sell its CDMA assets to China Telecom and merge its GSM assets with China Netcom, thus creating three integrated operators.

Cheung said that this restructuring plan is flawed because China Mobile will remain the dominant player in the market, and there will not be strong competition from the other operators.

CLSA's proposal is to merge China Unicom, China Netcom and China Telecom, creating what it calls a "super China Telecom" that can compete with China Mobile, he said.

"We think this is the right plan, though even if this plan is carried out, China Mobile will still be the dominant player," he said.

China Mobile's net income is expected to reach RMB 140.5 billion ($20.1 billion) in 2009, almost three times that of the "super China Telecom," he said.

However, he does not expect the government to adopt this "duopoly" plan, because it would represent a step backwards for the government, since it previously split China Telecom.

In 2002, the government split the former China Telecom into northern and southern operations, with the northern part renamed China Netcom. CLSA was against the plan, because it did not create more competition in the market, Cheung said.

CLSA expects China Unicom to sell its CDMA network to China Telecom at approximately a 20 percent premium, he said.

CLSA recommends long-term investment in China Mobile stocks, and advises investors to avoid buying China Telecom and China Netcom stocks.