Telecom Jitters Hit China
The two state-owned cellular companies aim to lock up market share before foreign competitors arrive. The result: Sagging stocks and anxious investors
For a long time, China's two big cellular phone service operators seemed largely immune to the global telecom meltdown. The two state-owned companies are both traded in Hong Kong exchanges, although they operate cellular networks in the mainland, the fastest growing mobile-phone market in the world. And while the stock prices of companies worldwide suffered badly, China Mobile (CHL ) and China Unicom (CHU ) were holding their own.
August has been a cruel month, however. China Mobile is now off 41% this year, vs. a 25% drop in the Hang Seng index. And China Unicom is now in the red, too, with the stock price off 18% on the year.
The bad news for China Mobile started a few weeks ago, when the company announced its first half results. Net profit was $1.6 billion. That itself was a bit of a disappointment -- Merrill Lynch, for instance, had forecast the company's first-half profits would be 3% higher. But what really spooked investors was China Mobile's revenue growth. While the number of subscribers grew an impressive 31% compared to the second half of 2000, and a hefty 67% compared to the first half of 2000, revenues increased a mere 3% and 10%, respectively.
RUSHING FOR CUSTOMERS. What happened? China Mobile faces new competition, for starters. China Unicom, the longtime Avis to China Mobile's Hertz, is coming on strong. Unicom had an IPO in Hong Kong last year and has been using the money to build itself up as a real competitor to China Mobile.
Moreover, with China preparing to enter the World Trade Organization, both China Mobile and China Unicom are anxious to secure as many customers as possible before Beijing has to open the market to new players. That means offering big discounts to new subscribers -- and offering comparable rates to old users, too. "They are driving the revenue curve down in order to attract as many subscribers as possible before the possible entry of a new operator," says Jonathan Shaw, an analyst with Bear Stearns in Hong Kong. As a result of the major price wars going on between the two big players, average revenue per user (ARPU) is falling dramatically. For China Mobile, monthly ARPU last year was $26.60. This year, it has fallen to $17.20, says Shaw. Next year, the fall won't be as sharp, but the trend will continue, he predicts, with monthly ARPU dropping to $13.50. By 2003, he says, it will be a mere $12.
The situation is no brighter for upstart China Unicom. Last year, its monthly ARPU was $14.90. This year, it's $11.45, and next year it will fall to $10.10, according to Shaw. By 2003, he predicts, Unicom will pull in just $9 a month from its average user.
HERD MENTALITY? The economics of the China market dictate some of those falls. Take the percentage of people who use a mobile phone, called the "average penetration rate" in industry parlance. That tells us how saturated the market is. In areas where Unicom has cellular franchises, the penetration rate is now about 14%, with the number likely to hit 17% by yearend. In Shanghai, the penetration rate is around 30%. That sounds low, especially compared to mobile-mad Hong Kong, where the penetration rate is around 70%. But China is still a poor country, and there are many people who can't afford mobile phones. China Mobile and China Unicom have had an easy time of it up till now by cherry picking the best customers. They can't do that any longer. That means more discounting is in store as they try to compete for customers on price.
Investors have been paying attention -- and they are fleeing. "People buy China for growth," explains one U.S. investment banker in Hong Kong who is active in the telecom industry. "If revenues grow only 10%, people are not satisfied." This banker decries what he sees as a herd mentality among investors in Chinese telecom stocks. "At the end of the day, market sentiment is fragile at this point," he says. Investors "don't want to be burned. At any sign of trouble, people rush for the exit. A year or two ago, people would have brushed off these things. Today, [the same things] become a major reason for the pounding of the stocks."
With the telecom industry showing so few signs of life worldwide, it's hard to fault investors for feeling skittish about China's cellular operators. The two companies may still be on track for impressive user growth. But that alone isn't going to sway investors worried about the illnesses afflicting the global telecom business.
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