Asian Tech IPO Focus: China Unicom Faces
Stiff Challenge
By VERNA YU
HONG KONG -- The second major mainland Chinese telecommunications
company to go public is expected to attract overwhelming demand, but
analysts warn there are potential weaknesses in the company that investors
shouldn't ignore.
The global initial public offering of China Unicom Ltd., a listing vehicle of
China's second-largest phone company, China United Telecommunications
Corp., is one of the most closely watched in Asia this year, and is expected
to raise up to US$4 billion.
"From the very broad sense, I'm pretty positive. It's just a matter of whether
Unicom's managers can execute on the opportunities successfully." said Tim
Storey, regional telecommunications analyst at Goldman Sachs Asia, which
took Unicom's rival, China Telecom (HK) Ltd. (CHL), public in 1997.
Since issue size and pricing details have yet to be determined, analysts are
reluctant to make projections about demand, but said it should be sizable
given the optimism about the telecommunications industry in China.
"The response should be good. (The size) is large enough, plus the telecom
factor, particularly in China," said one analyst.
The company plans a dual listing on the New York Stock Exchange and the
Stock Exchange of Hong Kong on June 21 and June 22 respectively.
Morgan Stanley Dean Witter & Co. is the lead underwriter for the deal.
But while China Unicom's listing gives investors a new path into the growing
Chinese mobile phone industry, analysts say there are pitfalls.
For one thing, China Unicom has been plagued by overdue payments and its
competitive powers in relation to China Telecom and other potential players
in the market are also being questioned.
Repeat Of China Telecom's Success?
Back in 1997, Unicom's main rival, then known as China Telecom (HK)
Group Ltd., raised $4.2 billion through the floatation of its unit, China
Telecom (HK) Ltd. The parent company has recently replaced the word
"Telecom" with "Mobile" in its name to reflect a more narrow business scope
and the listed unit has proposed doing the same, pending approval from its
shareholders.
The listed vehicle has since grown to become one of the top two Hong Kong
stocks by market capitalization and its share price rose to a high of HK$80
earlier this year before the technology slump began to take its toll, compared
with an IPO price of HK$11.68.
Investors are now asking whether China Unicom can repeat China
Telecom's success story.
Beijing certainly hopes so. In a move to make China Unicom a credible rival
to the dominant China Mobile, the Chinese government injected China
Mobile's paging business and other assets into Unicom over the past year.
Unicom has also been authorized to offer code division multiple access, or
CDMA, mobile services and has joined the Internet services market. And
China's telecommunications regulator has allowed Unicom to offer steep rate
discounts.
China Unicom's share of the mobile phone market rose to 11% at the end of
1999 from 5% at the beginning of the year, mainly as a result of the lower
fees, said analysts.
Early this year, the government also let Unicom join the fast-growing
domestic and international long-distance services market. In addition, China
Unicom controls mobile phone businesses in 12 Chinese provinces, compared
with China Telecom's six provinces.
Its unique integrated telecommunications businesses make it attractive for
potential investors, said some analysts.
"Today there's only one vehicle available for investors to participate in that
growth," said Storey of Goldman Sachs.
A "Weak Competitor" To China Mobile?
But analysts also note that China Unicom is still a weak competitor in
comparison with the China Mobile Group.
A report published by Warburg Dillon Read points out that China Unicom's
overdue receivables situation is probably worse in some regions than that of
China Mobile, which is owed overdue payments equaling about 10% of total
sales. This is mostly due to Unicom's lower fees, which attract lower-income
subscribers, who are less likely to pay on time.
Unicom is also expected to make a substantial provision, up to CNY1.6
billion according to some media reports, to unwind ventures involving foreign
companies which attempted to skirt government restrictions on foreign
investments. In fact, the listing has been delayed by the numerous
negotiations to unwind the partnerships, after the Chinese government
declared them illegal last year.
Moreover, Unicom's main edge over China Mobile - the lower fees - will be
eroded with any deregulation in the future, the company pointed out in its
preliminary listing prospectus.
China Unicom is also subject to capacity constraints because it has to
depend on China Mobile's network for connection to other operators'
networks on cellular and long-distance services, the company said.
Meanwhile, the plan to deploy networks using CDMA mobile technology still
remains on hold, according to a company official.
Challenges From Domestic Competitors
Though Unicom has been the beneficiary of government perks so far, some
analysts fret it could become the victim of the very policy that led to its
creation.
The Chinese government launched Unicom to spur competition, and it
continues to push new domestic companies into the market. With China's
expected entry into the World Trade Organization, the sector is also seen to
be heading towards a more open environment.
Unicom admits as much in the risk factor section of its preliminary U.S.
prospectus. "Increased competition from our existing competitors and the
introduction of additional competition through new entrants in our lines of
business could adversely affect our results," it says.
Some investors may shift parts of their portfolios to Unicom from China
Telecom, Storey at Goldman Sachs said, but added that his view on China
Telecom won't change just because China Unicom goes public.
"Unicom will be achieving a lot of growth from businesses that (China
Telecom) doesn't even operate in," he said.
One regional fund manager said Unicom will have to make quite an effort to
track the market performance of China Telecom, which he considers to be in
a "very good shape."
"They (Unicom) would do well.... but if they are to threaten China Telecom
they'll have to work very hard indeed," he added.
-By Verna Yu; +852 2832 2338; verna.yu@dowjones.com (Jason Dean in
Beijing contributed to this article)
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