Pro Picks: CSC Securities' Kenneth Lau Picks Three Telecoms For The Long Term
Hong Kong, December 7/ SHfn - Investors should look past the current uncertainty surrounding the telecoms sector and focus on the longer-term picture - is advice from CSC Securities' telecoms specialist Kenneth Lau. Despite the recent roller coaster ride of Hong Kong's telecoms counters, Mr Lau reminds investors not to overlook the huge growth potential of China's mammoth telecoms market. CSC Securities is Taiwan's second largest brokerage house. It has a strong institutional client base and has recently expanded its operations in the SAR.
"The China incumbents cannot lose," says Mr Lau. He cites the 5-percent penetration rate of China's embryotic wireless market as the best story going. Beijing's recent confusing regulatory announcements have hurt investor confidence towards the sector, but the two state-backed mobile operators, China Mobile [941] and China Unicom [762] will be winners in the longer term. Beijing's short-term policy shifts are outweighed by the growth potential in the sector in the lead-up to China's accession to the WTO. "Foreign investors will have to team up with them to enter the China market. They will not only hold the controlling stakes, but also absorb inflows of investment as well as free transfers of technology and skills," says Mr Lau.
Mr Lau admits that the "tone" of the sector has changed globally but that the sector continued to offer the greatest long-term potential. China plays are his favourite while Hutchison Whampoa's [13] aggressive and focused telecoms exposure also makes it an attractive play. Here are Mr Lau's three top picks:
China Mobile [941] - 12-month target $60.00 China Mobile has seen two major price adjustment phases explains Mr Lau. The cellular giant's share price shed almost a third of its value from the $80 range to about $50, following a global valuation adjustment in the sector. But he counters that China's domestic climate was basically unaffected by events elsewhere. The second phase was a recent slump triggered by the Chinese Government's indication that a one-way mobile tariff billing system would be introduced. The stock dived 16.9 percent in a week, from $47.10 to $40.30, but started to rebound on December 1 after a clarification by the Ministry of Information Industry that such a change would not take place for at least two years. The stock was able to claw back its earlier losses to a December 6 close of $46.90.
Prior to the first mention of the one-way tariff proposal, Mr Lau had a fair value on China Mobile of $66.40 on a discounted cashflow (DCF) basis. He has since revised his figures to factor in the following assumptions: 1) the one-way tariff system would be implemented in 2002; 2) its parent would approve a 50-percent reduction in leased line fees, and 3) there would be no increase in its subscriber base. "This has lowered our fair value estimate down to $49.50. The main assumption is that the one-way billing system will commence in 2002. Even if the proposal is further deferred, our fair value would only be lifted $1.00 to about $50.00," said Mr Lau.
But with the explosive growth increase in China's mobile phone subscriber base expected over the longer term, the stock's upside looks very robust. "Once the one-way billing system is implemented, both the minutes of usage (MOU) of existing subscribers and the number of new users are expected to surge," he added.
China Unicom [762] - 12-month target $17.00 As China's second largest mobile carrier, China Unicom is on course to gain market share from its giant rival. Mr Lau stresses that China Unicom targets users from lower-income groups who prefer cheaper rates with limited usage to better quality service. "China Unicom's subscriber base is expanding at a faster rate than that of China Mobile. The existing growth ratio of new subscribers is about 3:7 and will migrating to 4:6 or even 5:5," he says. As at the end of June, China Unicom held a 20 percent market share compared with China Mobile's 80 percent.
Moreover, Unicom is set to acquire a state-owned company that is licensed to operate fixed line networks with huge coverage in the mainland. This is likely to happen for three years but Mr Lau says investors should not underestimate the potential profits likely to be derived from this new source, which may in the long run offset the Company's shrinking paging service earnings.
Hutchison Whampoa [13] - 12 month target $160.00 Hutchison is regarded as very "shrewd" in bidding for 3G licenses around the world. Its last-minute retreat from selected overpriced 3G tenders in Europe has limited the Company's risk exposure. "If you're talking about a market that may potentially break-even in ten years time, Hutch is unlikely to be interested," Mr Lau says.
Unlike other players in the sector that have multi-dimensional investments in the internet and mobile businesses, Hutchison has focused solely on the development of 3G mobile networks. "In the near future, the whole trend will be all about data transmission and everyone will be using mobile phones to get online. Lucrative returns and large growth potential are expected in this area," Mr Lau says. Apart from the conglomerate's successful bidding earlier in Europe and its joint venture with NTT DoCoMo [NTDMY] to exploit the UK telecoms market, Hutch is also vying for a piece of the pie in Asian countries such as India and Malaysia. Mr Lau adds that Hutch is able to leverage the stable and growing earnings at its worldwide ports business to benefit its telecoms expansion strategies.
Mr Lau also summarised for StockHouse his views on other telecoms sector companies listed in Hong Kong.
Pacific Century CyberWorks [8] - Hold Mr Lau emphasises that companies that provide networks for telecoms operators are bound to be winners because no matter how competitive the wireless market becomes, they would still benefit with their fixed network assets. For this, he picks Pacific Century CyberWorks [8] as the internet and telecoms group owns HongKong Telecom's profitable fixed line network which has a dominate 90 percent market share in Hong Kong. "The other value of the Company is its IP backbone venture with Australia's Telstra [X.TLS]," says Mr Lau. But weighing on the stock is the legacy of the HongKong Telecom takeover from Cable & Wireless [L.CW.]. "C&W will sell a 7.5-percent stake in PCCW in February and another 7.5-percent in August. If CyberWorks can find a buyer for C&W's stake, the stock price would stabilise," he said.
Mr Lau has sell recommendations on two smaller players in the sector.
SmarTone [315] Hong Kong's fixed line market is saturated while the wireless market is feverishly competitive (over 50 percent penetration rate). Mr Lau believes SmarTone will have a tough time maintaining market share in current conditions. Unlike heavyweights such as Hutchison Whampoa, SmarTone is not big enough to tap overseas markets. Even if it is awarded one of the four 3G licenses to be tendered by the SAR Government, other mobile operators will be allowed to rent capacity on its networks.
The stock's recent boost, fueled by rumours that Singapore Telecom [SI.TELE] is interested in acquiring British Telecom's [L.BT.A] 20-percent stake in SmarTone, is only a short-term movement. Mr Lau explains that the sale, if enacted, would not increase SmarTone's exposure to the lucrative China market.
China Motion Telecom International [989] "Two of the Company's three major businesses are not making money," cites Mr Lau. And as such, he expects downside for the stock. Moreover, the telco posted an interim net loss of $237m for the six months to September 30 2000 vs net profit of $54m in the previous corresponding period. "Its paging and the retail divisions are still loss making, with only IDD services in the black," he adds.
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