Asian Stock Focus: China Unicom Growth Story
Wins Fans
By KIRSTI HASTINGS
Of DOW JONES NEWSWIRES
HONG KONG -- As China Unicom (CHU) continues to gain market share in
what will rapidly become the world's largest cell phone market, its shares are
also winning many fans.
Unicom has been trading at a discount to China Mobile (CHL) since listing
nearly a year ago but that gap is shrinking as Unicom grabs market share
from its larger rival, analysts and fund managers say.
In addition, they say plans to add 18 provincial networks to its growing
universe of subscribers as well as tap growth possibilities from its parent's
new Code Division Multiple Access (CDMA) network, being rolled out this
year, will also boost value for shareholders.
"The market perception has been that (Unicom) was a poor relation to China
Mobile," said Edmund Harriss, who manages the Guinness Flight Hong Kong
Fund for Investec Guinness Flight. "People thought that the subscriber base
was lower quality and its average revenue per user (ARPU) was lower so it
traded at a discount to China Mobile."
"The stock got hit pretty frequently but perceptions are changing," Harriss
said. "The market is seeing it's growing at a faster rate than China Mobile. It
has a higher proportion of postpaid subscribers, which are better quality, and
its ARPU is not quite as dire as people were expecting."
Meanwhile, Unicom's capital expenditure bill looks set to shrink, its fixed-line
and paging businesses are largely ignored in the stock's valuation and the
rollout of CDMA networks will boost potential capacity.
"All these factors make Unicom look a lot better than previously thought," said
Harriss. "I prefer it to China Mobile," he added, noting that once the stock was
included in the Hang Seng Index on June 1 he added quite a bit to his fund,
which now has an overweight position on Unicom.
Unicom Up 77% Since Early April Low
Unicom's shares have already outperformed the Hang Seng Index this year
and in the last couple of months in particular, but there is still room for growth,
analysts said.
Unicom closed at HK$13.75 on Wednesday, up 77% from its HK$7.75
all-time low reached on April 4, compared with the Hang Seng Index which is
up 12% in the same period.
The gains have been driven by a host of factors, including its inclusion in Hong
Kong's benchmark index and statistics showing it continues to gain new
subscribers at a furious pace. Unicom's subscriber base rose 36% in the first
four months of the year to 17.35 million.
"China Unicom is snatching market share from China Mobile," said Arthur
Law, an analyst at Core Pacific-Yamaichi International (HK), noting that
Unicom's share of the Chinese market grew to nearly 23% by the end of 2000
from 7.1% in 1998. Law expects "China Unicom's market share could climb
to as high as 30-35% in the next two to three years."
According to Merrill Lynch, China's mobile market will triple to 300 million
subscribers by 2005 from about 100 million now.
At the same time, the acquisition of mobile networks in 18 provinces and one
municipality will be a key driver for Unicom's expansion and share price gains,
analysts say. While concern about financing for the deal may cast a shadow
over the stock until details of the price and terms are revealed, analysts say it
will ultimately be positive.
Acquisition Of Networks Seen Positive
"Acquisition of (the networks) will be positive for Unicom since Unicom will
create China's first investable nationwide network and will tap equity and debt
markets (to finance the deal) before competitor China Mobile," Colin
McKallum, an analyst at HSBC Securities said in a recent research report.
HSBC has a "buy" recommendation on the share and a 12-month price target
of HK$20, representing 45% upside from Wednesday's close.
Unicom hasn't yet confirmed details of its plans to acquire the networks,
which are mostly located in China's less affluent West, but is widely expected
to complete the deal by September or October.
HSBC values the 19 networks at US$11.7 billion and says that despite lower
income levels in the hinterland provinces, the networks represent "a
strategically important, very high-growth opportunity for Unicom."
"Even at today's income levels, current penetration is only 4.3%. In the first
quarter of this year, the Unicom group's subscriber base (in the region)
rocketed from 6 million to 9 million," the HSBC report said.
The deal is expected to be financed through a combination of debt and equity,
with an emphasis on debt, unless the share price rises above its IPO price of
HK$15.58 before then, HSBC said. Also the bulk of the equity will be issued
to its parent, China United Telecommunications, limiting the dilutive effect on
shares.
News that Unicom's parent might issue A shares has reduced investors
concern about the impact of a fund-raising exercise on the share price, said
Lilian Leung, who covers the company for Indosuez W.I. Carr Securities.
Meanwhile, there are other advantages for China's second largest cell phone
operator.
Unicom faces a very benign environment in terms of competition, unlike
fiercely competitive telecom markets in Hong Kong or in Europe, and is
allowed to price its services at a discount to China Mobile's, analysts said.
With only two operators - and China unlikely to issue a third cell phone license
for at least another year - China for "the next one to two years is still a
duopoly market," said Edison Lee, head of Asian telecom research at CLSA,
who has a "buy" recommendation on the share.
More importantly though, Lee says is China telecom operators' bargaining
power for equipment costs.
"It's a growth story" but "the most positive theme is falling equipment costs,"
Lee said. China will account for 23% of global sales of 2G network equipment
in 2001 so "it has tremendous bargaining power with equipment suppliers" and
capex costs will likely be lower than expected.
Unicom will also benefit from its parent's plans to build a CDMA network
that will initially accommodate 15.5 million users. The listed unit is expected to
lease the network from the parent, paying only a marginal premium to cost,
Lee said. The CDMA network can potentially accommodate 35 million to 40
million subscribers.
"CDMA, net-net is positive for Unicom," he said.
-By Kirsti Hastings; Dow Jones Newswires; (852) 2832 2337;
kirsti.hastings@dowjones.com |
