Lehman Downgrades China Netcom on Slowing Growth and 3G Risks (CN)

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Includes: CHA, CHL, CHU, CN-OLD

Hong Kong based Lehman Brothers analyst Lu Sun downgraded fixed-line operator China Netcom today citing slowing growth and 3G risks. China Netcom trades on the Hong Kong Stock Exchange, and on the NYSE under the ticker symbol "CN". Here are the highlights of Sun's note to clients:

China Netcom Group (HK$ 13.30) 2 - Equal weight

Change in Recommendation

Investment Conclusion

  • We expect CNC's revenue and net profit growth to slow significantly in 06 and 07, owing to wireless substitution and mkt competition. This, combined with looming concerns over 3G execution challenges, should weigh on the stock in 06. We lower our rating on CNC to 2-EW, and our 12m PT from HK$14.5 to HK$13.5.

Summary

  • We expect CNC to deliver total revenue CAGR of 3.5% and net profit CAGR of 3.5% in 06-08, similar to that of China Telecom, as cost savings-driven net profit growth was mostly realized in 05.
  • CNC's nationwide wireless ambition maybe hard to realize given the company's lack of scale in network and distribution, and significantly weaker balance sheet, in comparison with CT. Potential 3G rollout could reduce our est. further.
  • We have revised down 05–07 earnings ests by 9-10%, respectively, to reflect lower revenue and margin assumptions. Consensus estimates and investment ratings are too positive in our view.