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Writedown fears weigh on China Telecom
Georgina Lee

A possible writedown by China Telecom on the 10 provincial networks it recently acquired and the per-share earnings dilution after it placed new shares to fund the purchase are weighing on the company's rating and stock target price, analysts say.

China Telecom shareholders recently approved a proposal to buy 10 provincial networks from its parent for US$3.36 billion (HK$26.2 billion) cash and US$4.84 billion debt.

In the wake of the deal, Standard & Poor's Equity Research rated the company a ``hold'' while HSBC Securities downgraded it to ``add'' from ``buy''.

Steven Koh, research director at S&P Equity Research, said one reason why he did not give a higher rating to the stock is because China Telecom may repeat its previous practice of writing down the acquired group assets. China Telecom wrote down 14.69 billion yuan (HK$13.84 billion) of assets in 2003 after the group recorded a deficit on revaluing acquisitions in six provinces - Anhui, Fujian, Jiangxi, Guangxi, Chongqing and Sichuan.

``A write-down [on the 10 provinces] could happen if the group has failed to provide for some [assets] during its due diligence; or that certain assets have [dropped in value],'' Koh said. He estimated a HK$2.82 12-month target price for the stock.

Shares of China Telecom have shed 20.31 per cent so far this year, compared with the 5.77 per cent drop of the benchmark Hang Seng Index. The stock gained 2 per cent yesterday, closing at HK$2.55.

Likewise, because of slower earnings per share growth expected for 2005 due to dilutive effect from a recent new share issue, HSBC Securities expected a lower 7.3 per cent year-on-year growth in earnings per share at 36 HK cents, one reason behind its recent downgrade.

In April, the southern fixed-line giant successfully raised US$1.725 billion (HK$13.45 billion) by placing 5.85 billion new shares to fund the acquisition of 10 networks from its parent, China Telecom Group.


Both S&P Equity Research and HSBC Securities see China Telecom's capital expenditure (capex) increasing this year. HSBC is expecting 57 billion yuan capex from 56.5 billion yuan in 2003, as it rolls out networks in the newly acquired provinces.

On a positive note, Goldman Sachs said in a recent report that China Telecom will have the most to gain from the issue of 3G licences among the four Chinese telcos.

This is because a 3G licence will allow the bigger of the two fixed-line players in China to catch up with the trend of voice traffic migrating to cellular networks, and such a licence is thus critical to China Telecom.

Goldman expects that if China Telecom begins 3G services in 2007 it will add 13.5 million new subscribers in the first year, rising to 16 per cent of the nation's total subscribers by 2014. Also, it will be better off leasing the network from its parent than building it directly itself, Goldman said. That was because the impact of 3G on its estimated net profit would be a smaller 4.2 per cent in 2007 at 29.05 billion yuan, compared with an 11.8 per cent hit to 26.74 billion yuan if the network is built with its own capital.

Yesterday, Ministry of Information Industry Vice-Minister Lou Qinjian said Beijing is yet to set a schedule for issuing 3G licences.

Equipment for its home-grown 3G standard, TD-SCDMA, will be ready for use by mid-next year. Listed China Telecom now operates in 20 provinces.

24 June 2004 / 02:27 AM


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