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China telecom profits seen up, but growth slowing
Reuters, 03.15.04, 3:48 AM ET

http://www.forbes.com/technology/newswire/2004/03/15/rtr1298274.html

By Doug Young

HONG KONG, March 15 (Reuters) - China's three biggest listed telecoms firms are expected to report that earnings rose 12-24 percent in late 2003, but all three face declining growth as their markets mature and acquisition opportunities run out.

Both China Mobile (Hong Kong) Ltd <0941.HK> and China Telecom Corp <0728.HK>, the country's largest mobile and fixed carriers respectively, have said they will buy network assets form their state-owned parent firms, although neither has provided details.

At number-two cellular carrier China Unicom Ltd <0762.HK>, investors will focus on the performance of its CDMA (Code Division Multiple Access) network, which recently became profitable after a sluggish launch two years ago alongside Unicom's GSM (Global System for Mobile Communications) network. China Mobile also uses GSM. Each is under pressure to find new avenues for growth as the addition of new customers slows in the world's largest mobile market by subscribers. Having signed up the biggest spending, most profitable customers, all three now compete for lower-spending callers who form the bulk of China's population.

China's 277 million mobile subscribers gives it a penetration rate of about 20 percent. Some 60 percent of China's population are classified as rural and most cannot afford a mobile phone.

"There will be growth," said Nomura International analyst Kelvin Ho. "But you always have a trade-off between subscriber growth and profitability."

China Telecom will kick off the earnings season when it reports on Wednesday. Analysts expect the company's second half earnings to grow 12 percent to 9.47 billion yuan (US$1.1 billion), according to a survey by Reuters Research.

China Mobile will follow on Thursday, with fourth-quarter earnings expected to climb 25 percent to 9.52 billion yuan.

Both China Telecom and China Mobile are expected to discuss their acquisition plans when they announce results. China Mobile is expected to buy the remaining 10 provincial phone networks it does not already own from its state-owned parent, while China Telecom is expected to buy up to 11 networks from its parent.

Such acquisitions have been the norm for China's listed phone companies, which have gone public with their parents' most profitable networks first, then bought the less profitable ones over time, usually at a discount.

"For China Mobile, the biggest issue in 2004 will be the acquisition -- the price and whether it's value-enhancing," said UOB Kay Hian analyst Edward Fong.

"For China Telecom, it's again the acquisition...If you look at the company's balance sheet, it's pretty much stretched, so they may have to (issue new shares)."

Analysts are not expecting the acquisitions or the share issues to fund them to be announced with the results.

Concern over such a new issue -- which would dilute the earnings from current shares -- has weighed heavily on China Telecom's shares, which are down 22 percent from a record high of HK$3.50 in January this year. China Mobile shares are up 3.5 percent so far this year, in line with the Hong Kong market's 2.9 percent gain.

After the upcoming round of acquisitions, all three carriers will be close to exhausting this method as a means of future growth. As new growth prospects slow, the companies are starting to behave more like utilities that entice investors with steady income and regular dividends.

EYES ON CDMA

When Unicom reports results next week, investors will look for signs that its CDMA wireless network, with 20 million users at the end of January, can be significantly profitable this year.

Analysts expect Unicom's second-half profit to rise nearly 17 percent to 2.81 billion yuan, according to Reuters Research. Shares of Unicom are up 28 percent this year.

Investors will also be looking for the impact from "little smart". The heavily promoted low-end wireless service from China Telecom and China's other top fixed-line carrier, China Netcom, has been stealing market share from the two wireless carriers.

And the market will look for clues on China's plans to issue licences for third-generation (3G) mobile services.

Beijing is expected to license its top two fixed-line phone companies, China Telecom and China Netcom, to enter the wireless arena at the 3G level, providing new competition for incumbent carriers China Mobile and Unicom.

China Netcom is planning an initial public offering to raise up to $3 billion later this year.

But analysts do not believe new licenses will be issued until the end of this year at the earliest.

Copyright 2004, Reuters News Service