China's telecom industry restructuring got the green light on Saturday, May 24, 2008. This is the Chinese telecom landscape before and after.
Couple of points I want to raise. While the general idea of leveling the battleground for telecom players may sound well, the end result will be three seemingly similar, yet different companies. As an investor, you should look into details to get ahead of the game.
The story is clear. China Telecom (CHA) will buy China Unicom's CDMA network for an undisclosed amount. With that it will have 259 million subscribers plus the potential of the mobile network. China Unicom's other mobile network, GSM, will be merged with China Netcom's fixed line business, creating a company with 234 million subscribers. China Mobile will get fixed line network of China Tietong, the network of the former railway company. This is the story in a nutshell.
What is important to consider is not just the total number of subscribers but the dynamics of it. It's widely known that mobile carriers are piciking up subscribers at a fast pace yet fixed line users started to shrink. The number of fixed line subscribers stood at 365.4 million at the end of December 2007, down by -2.3 million from December 2006. During the sae time number of mobile subscribers grew by 86.2 million to 547.3 million. As the following insert from a Chinavestor CHL 2007 full year analysis unfolds, China Mobile is not only the biggest among the telecom players but is growing the fastest. And remember: China Mobile's net profit of $12.5 bln for 2007 was twice as much as CHA, CHU and CN combined! Now here is the insert from the stock research report avaiable for Chinavestor subscribers.
In the past three years, the total number of subscribers of China Mobile has risen steadily, growing at an average rate of 22% p.a. The growth rate for each month compared with the same period from the previous year was averaged at 26% and 27% in 2006 and 2007. By the end of 2007, total subscribers reached 369 million. In the first two months of 2008, the growth rates of number of subscribers jumped to 45% in January and 63% in February, compared with January 2007 and February 2007 respectively. Currently, the total subscribers are over 384 million.
In comparison, in October 2007, China Unicom’s new users grew 1.49 million, slightly lower than September by 30 thousand new users. GSM new users rose 1.13 million, increasing 22.5% from October 2006, but falling 2.9% from September 2007. CDMA new users grew 0.36 million, representing 1.1% increase from September 2007, but a decrease of 0.8% from October 2006.
In October 2007, China Telecom lost 880 thousand fixed-line users to 223 million and China Netcom lost 370 thousand fixed-line users, hitting a record high of customer outflows. However, broadband users had grown steadily, with 550 thousand new users for China Telecom and 460 thousand new users for China Netcom. In total, China Telecom had 34.44 million broadband users and China Netcom had 18.82 million broadband users by the end of October 2007. The superior customer acquisition ability will sustain China Mobile competitiveness.
The same Chinavestor CHL analysis reveals that China Tietong may be a strategically good fit given it's composition of fixed line subscribers: corporation and institutions.
After the restructuring, China Mobile, merged with Tietong, is expected to remain as the number one player with unbeatable advantages until GSM and CDMA separated from China Unicom are developed to cover wider ranges and provide better signal in smaller cities.
Tietong is a major unlisted state-owned fixed line operator. At the end of 2003, its total assets amounted to 43.1 billion, while China Netcom had 179.5 billion consolidated total assets and 74.4 billion company total assets and China Telecom had 305.6 billion consolidated total assets and 168.3 billion company total assets. Although Tietong’s network has not covered as large local network as China Netcom and China Telecom, it has covered all the area close to national railway network and almost all the business areas and major residential areas. More about Tietong, visit its website: http://www.chinatietong.com/english/index.htm
Due to the locations of its network, Tietong is faced with fierce competition. It will have some disadvantages to the other fixed-line operators in the near future. Development of infrastructure will take time and require large amount of funds. While funding will be complemented by China Mobile after the restructuring, their combination is likely to create more synergy values.
In all, adding a fixed-line business to a mobile business operator is not as complicated as adding a mobile business to a fixed-line business operator, since mobile business will be the mainstream of the market and it will take time for fixed-line operators to accumulate skills, expertise, knowledge and technology of running a new type of business. After the merger, China Mobile can leverage its strong base of mobile customers to provide bundled services covering cable, internet and phone. Thus, the merger of a stronger mobile operator and a slightly weaker fixed-line operator provides a more certain outcome than the merger of two parties with a stronger fixed-line business but a weaker mobile business.
For detailed stock research reports of CHL, CHA, CHU visit http://chinavestor.com/research.asp Wish you successful investing.