Hong Kong-based S&P Analyst David So published a research note last week initiating coverage of China Netcom (ticker: CN). The following are highlights of So's report:
- We are initiating coverage of China Netcom with a 5-STARS (Strong Buy) recommendation and a 12-month target price of HK$17.00 (ADR $43).
- As the stock is trading at a 2005 adjusted PE of 9.5x, we believe it is undervalued given an adjusted 3-year CAGR (2004-2007) of 17% in EPS.
- We believe the acquisition of the four provincial networks in 2H05 to be significantly earnings-accretive. Given that China Netcom had delivered a strong 1H05 performance, we expect it to report stellar full-year results for 2005.
- In addition, the potential for China Netcom to gain a mobile license in China (PRC) next year as a result of the consolidation/restructuring of the country's telecommunications industry should generate share price upside, in our opinion. We believe China Netcom currently trades at a discount to its better known peers like China Mobile (ticker: CHL) due to the absence of the mobile license, and may therefore see an upward re-rating should it be awarded the license.
- Downside risks to our recommendation and target price include a greater-than expected decline in broadband ARPU, further delays in attaining its 3G license and stronger-than-expected competition.