The Wall Street Journal-20080116-Rumors Don-t Ring True-- Betting on China-s Telecom Overhaul Can Be Costly
Return to: The_Wall_Street_Journal-20080116
Rumors Don't Ring True?; Betting on China's Telecom Overhaul Can Be Costly
Beijing -- Investors who follow the old axiom "buy on rumor, sell on fact" when trading shares in China's telecommunications sector have been getting burned.
A series of speculative reports saying long-awaited industry restructuring is imminent have triggered waves of buying in shares of China's big telecom operators. Then, generally, the buying has been quickly followed by waves of selling, erasing short-term rises in share prices.
Analysts who follow the sector say the actual restructuring is at least eight months away. They say there are potentially good picks among the four listed carriers -- China Mobile Ltd., China Unicom Ltd., China Telecom Corp. and China Netcom Group Corp. (Hong Kong) Ltd. -- all of which trade in both New York and Hong Kong. But they advise investors to focus on the fundamentals and think long term, rather than chase buzz about timing. "People should not be trading around these rumors," says Eric Wen, head of Chinese telecom and Internet coverage at BNP Paribas in Shanghai.
The latest round of speculation came last Friday, when unconfirmed reports that the restructuring plan had been finalized caused Hong Kong shares in Unicom to jump nearly 7%. The Ministry of Information Industry, which regulates the sector, as well as representatives for the Chinese operators denied any new restructuring developments. Unicom shares have since lost all of Friday's gains.
Analysts in Beijing say the government is likely to wait until after the Olympics in August to initiate the restructuring. Liu Bin, an analyst at technology consultant BDA China Ltd., says the changes might be discussed during the annual session of China's legislature, the National People's Congress, in March. He says the restructuring is unlikely before summer because carriers need stable operations to guarantee good service for the Games.
When it does come, the restructuring is likely to cause sweeping change. The industry is now divided among two wireless carriers, China Mobile and China Unicom, plus two big fixed-line carriers, China Telecom and China Netcom, that have long struggled with the defection of their customers to wireless service. The government owns controlling stakes in all four carriers.
Analysts generally agree on the broad strokes of the coming restructuring. They expect the government to break up China Unicom -- which now operates two different types of wireless networks -- and join its assets to the two fixed-line carriers. That would let China Telecom and China Netcom compete in the wireless sector with China Mobile, the world's largest mobile carrier by number of subscribers.
Michael Meng, a Citigroup analyst, wrote in a report Friday that Unicom, with a market capitalization of about US$28 billion, was undervalued. The total value works out to $234 a subscriber, which he said is the lowest figure in the Asian-Pacific region.
With a "buy" rating, Mr. Meng set a 12-month target for Unicom stock of 22 Hong Kong dollars (US$2.82). Yesterday, a day on which Hong Kong stocks tumbled, shares of China Unicom fell 3.1% to HK$17.48. The Citigroup analyst has a "buy" on China Mobile. With 362.8 million subscribers, the company claims 67% of the world's largest population of 540 million cellphone users.
Wendy Liu, an analyst for ABN Amro in Hong Kong, expects it will take time for China Mobile's competition to improve. She has a 12- month target of HK$200 for the shares, which fell 4.1% to HK$124.80.
---
Zhou Yang in Beijing and Bai Lin in Shanghai contributed to this article.
