Slowing growth may compound China cellular woes
Saturday, January 5, 2002
REUTERS
The furious rate of new subscriber growth that made China the world's biggest mobile phone market last year slowed dramatically in November, compounding an already volatile mix of uncertainties that could dog the nation's two cellular heavyweights in 2002.
Shares in market-leading China Mobile (Hong Kong) and China Unicom Ltd fell sharply in 2001 -- by 35.56 and 28.03 per cent, respectively -- and pessimists in the market fear that regulatory and competitive factors could exert further pressure on the two Hang Seng Index laggards this year.
"If China wants to maintain subscriber growth this year, tariffs cuts are a must. If no cuts are forthcoming, subscriber growth would slump," Nomura International analyst Richard Ferguson said following the release of November subscriber numbers.
Those numbers showed China added 3.9 million net new mobile users in the month ended November 20 for a total of 140 million -- impressive figures anywhere else -- but the gain lagged the 5.1 million monthly average clocked in the year to date.
Some observers say the slowdown indicates that Chinese who can afford a cellphone nowadays probably already own one.
China's two listed carriers both reported narrower rates in the decline of subscriber growth than the national figure, indicating that much of the drop-off occurred in the unlisted provincial networks owned by the two firms' respective parents.
However, China Unicom plans this year to buy the remaining networks from its parent, while China Mobile has said it may buy eight of its parent's 18 remaining provinces this year.
Some industry watchers said the November performance was a one-off, and that vigorous growth rates will resume.
"I don't really see a good reason why growth needs to just drop down significantly," said ABN AMRO analyst Joe Locke.
But others expressed concern.
Clearly the hypergrowth rate is not going to last a lot longer," said Salomon Smith Barney analyst Rohit Sobti. "I am a little worried about both these names."
China Mobile shares rose 0.55 per cent on Thursday to close at HK$27.20, while China Unicom was unchanged at HK$8.70.
China's allure for cellular stock investors -- which peaked when China Mobile reached HK$80 a share in March 2000 -- has faded as intensifying competition and declining per-user revenues have eroded both stocks' attractiveness.
In 2002, China is expected to issue one or two new mobile licences -- one of them possibly to fixed-line giant China Telecom ahead of its anticipated initial public offering -- a worry that analysts say has been priced into both counters.
Several analysts also expect China to enact some sort of fee or tariff cuts. China Mobile's standard rate is 0.6 yuan (US$0.07) per minute for prepaid users, and 0.4 yuan for contract users, which Unicom can undercut by 10 per cent.
Another possibility is the oft-discussed implementation of so-called "calling party pays" pricing, where only the maker of a cellular call pays, a move that would cut carrier revenue in the short term but likely boost usage over the long haul. Both the caller and receiver in China now pay for a cell call.
Both companies enjoy fat margins that sceptics say can only narrow.
And then there is the wild card of China Unicom's new CDMA mobile network, which launched in the new year alongside its GSM system. Critics say it was a bad idea to build the network, and worse to try to position it as a high-end offering, as China's market growth is coming from lower-spending users.
"We believe the issue of additional cellular licences, the commencement of calling party pays, and tariff discounting are likely to act as an overhang on both China Mobile and China Unicom," ING Barings wrote in a 2002 preview note.
Flavia Cheong, fund manager at Aberdeen Asset Management in Singapore, which manages about US$3 billion in Asia, said she is leaving her China Mobile holdings untouched for the moment.
"When it was HK$60, it was too expensive," she said. "And then we thought HK$25-30 would be a better reflection of the uncertainty in the market, and the fact that it might not be high growth for long and the quality of users is not very good, and I think current prices reflect that."
China Mobile trades at 19 times forecast 2001 earnings, while China Unicom has a price/earnings ratio of 27.9 times.
ABN AMRO's Mr Locke has 12-month price targets of HK$34 for China Mobile and HK$11.50 for China Unicom.
Nomura's Mr Ferguson, however, thinks both stocks are headed in the wrong direction. He predicted 12-month prices of HK$15.80 for China Mobile and HK$6.30 for China Unicom.
He predicts China will add 4.3 million new mobile users a month in 2002, assuming a 15 per cent tariff cut -- the sort of move Ferguson said is essential to maintain subscriber growth.
"If it goes lower, I might just buy more," said Aberdeen's Ms Cheong, referring to China Mobile.
"It's a business that's profitable, it seems to be well-run and management seems professional. And they haven't ripped off shareholders since they've been listed, which is an achievement, isn't it?"
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