Telecoms Will Be the Big Story in Asia Again
By LESLIE P. NORTON
If 1999 was about anything it was telecoms -- starting with Olivetti bidding
for Telecom Italia, ending with three Japanese phone companies merging and
Vodafone AirTouch bidding for Mannesmann -- and with Qualcomm headed
for the moon. According to Birinyi Associates, telecom service providers and
equipment manufacturers accounted for 42% of the gain in foreign stock
markets last year.
It may have been overshadowed by Qualcomm's gain, but NTT DoCoMo,
Japan's leading cellular provider, became the world's third-largest company.
Kyocera, Japan's biggest maker of CDMA phones, in the waning days of
December seemed destined to close limit up every day. Valuations in Asia
now look pricey, thanks to the craze for anything having to do with the
wireless data theme. In Japan, the frenzy was stoked by DoCoMo's launch of
its I-mode service, which offered limited Internet access and has been adding
dozens of sites a month and seeing big gains in customer usage.
True, the largesse wasn't shared equally. The ADRs of Philippine Long
Distance Telephone, for example, are flat on the year. Concerns are mounting
that greater competition in long distance could spell trouble for earnings
around the region. A Nasdaq correction, triggered perhaps by a Fed rate
boost, would definitely drag these stocks lower. But some quipped that you
could always buy a put on Nasdaq. And big investors still find plenty to like in
Asian telecom operators, even among those that rose sharply last year, and
predict that a correction will provide a buying opportunity. "We're due for a
short, sharp correction in the first half, but are probably at the early end of a
three-to-five year bull market in Asian technology and telecom," says Mark
Headley of the Matthews Funds.
David Linehan, who picks Asian stocks for U.S.
Trust, thinks telecom will be "an even better story
in 2000," particularly in China and Japan. Says Linehan: "Average revenues
per user will climb, as we see increased delivery of the Internet over cell
phones. Companies and investors will be surprised on the upside by
profitability, and the stocks will expand well above where people believe they
will go. Equipment costs are coming down, so the amount of capital
investment will start to level off or begin to come down."
The easy answers for many U.S. investors dabbling abroad have been
DoCoMo, up 322% in 1999, and China Telecom, up 261%. George Greig
of William Blair International Growth stuck to both last year, citing lack of
sufficient growth from plays like Telekom Malaysia and Australia's Telstra.
DoCoMo and China Telecom are now priced comparably to global rivals,
but "I wouldn't be terribly afraid to buy at these levels if new funds were
coming in," says Greig. "They're in good competitive positions, less vulnerable
to market challenges than a lot of incumbents."
Liquidity early in the year was looking good. In Japan, at least, there is plenty
of cash to throw at telecom and technology plays. Nomura Asset
Management, for example, is said to be preparing a new
information-technology fund, the latest in a series of similar funds popular with
retail investors. Brokers think they can raise roughly $2 billion.
Money flows are strong for Matsushita Communication Industrial, Singapore
Telecommunications, Datacraft Asia, Telekom Malaysia, China Telecom,
Thailand's Advanced Info Service, Japan Telecom and DDI, according to
Birinyi Associates. That generally suggests that for the time being, those
stocks will keep rising.
You might expect more consolidation too this year. Recently, Japan unveiled
its largest merger to date -- a $26 billion tie-up among the country's three
less-competitive telecom carriers, KDD, DDI and IDO, creating that
country's second-largest telecom company. DoCoMo has bought stakes in
Asian competitors. Then, too, big global players are likely to turn to Asia as
countries deregulate. That "would rapidly improve Asian players' economies
of scale," says Morgan Stanley in a recent report. Linehan of U.S. Trust
expects to see U.S. companies forming alliances with Asian providers, just as
AT&T and British Telecom bought a third of Japan Telecom last year. Japan
Telecom and Vodafone own wireless provider J-Phone. Other providers like
the new DDI may be attractive to new partners like Bell Atlantic or MCI
WorldCom.
A major change in Asia's telecom landscape would occur if Britain's Cable &
Wireless were ever taken over or broken up, a subject of much speculation
last year. Cable & Wireless has a major global network, cable assets in the
U.K., and controls Hong Kong Telecom and Cable & Wireless Optus of
Australia. A breakup of Cable & Wireless might allow Optus and Hong Kong
Telecom to seek other partners.
While nobody was making a case that DoCoMo is cheap, some are fond of
its parent, NTT, which also controls NTT Data, a major provider of data
communications. Excluding those pricey stakes, NTT's enterprise value is just
2.5 times its EBITDA. Stephen Parlett, the telecom analyst for Montgomery
Asset Management, calls NTT "the best play for the Internet in Japan,
because it has 98% of the local access market." In the coming year, it will also
benefit as it cuts headcount and other costs. NTT rose 101% last year.
Parlett also likes Optus, which has a long-distance network, a broadband
cable network, Australia's second-largest GSM mobile network, and an
extensive presence in central business districts. Optus@Home, a joint venture
with Excite@Home, brings high-speed cable modem service to customers.
"This is the kind of thing AT&T has been trying to put together with its
wireless business!" exclaims Parlett. Optus' enterprise value is 14 times its
EBITDA for the year ending March, 2001. Meanwhile, EBITDA is growing
25% a year. Optus rose 48% last year.
Then there's Telecom New Zealand, where profits are recovering after being
bashed by the rapid decline in international long-distance prices. To boost
growth, it's been investing in mobile phones and the Internet. Last year, it took
a controlling stake in AAPT, an Australian mobile-phone operator. Parlett
sees the company listing its Internet subsidiary this year. The company's
enterprise value is nine times EBITDA for the year ending June, somewhat
higher than its growth rate. Yet that growth rate is still recovering, Parlett
points out. Meanwhile, Telecom New Zealand also has hidden assets it could
list, including an undersea cable linking Australia and New Zealand. Telecom
New Zealand was up 9% last year.
Linehan of U.S. Trust likes China Telecom, which is swiftly adding new
cellular subscribers. Their numbers and the revenues they generate can only
grow with Internet usage. Now, Linehan notes, just seven million users tap
into the Internet regularly, or 0.6% of the Chinese. Compare that with Hong
Kong's 15% penetration. Linehan thinks that within 18 months or less, China
will allow China Telecom to link up with foreign partners. He thinks the ADR
is worth $300, versus $125 now.
With the Philippines being Asia's worst market in 1999, Gabelli Global
Telecommunications Fund's Marc Gabelli favors PLDT, which dominates
both the local and long-distance business and with just 2.5 million subscribers
has "the lowest teledensity in Asia -- just 3.1 lines per 100 people!" Even
using relatively low multiples on its cash flow, Gabelli thinks PLDT is worth
some $41 per share, compared with 26 last week.
What's to avoid? Among other things, Linehan advises steering clear of
cellular operators in a market like Hong Kong, where there's too much
competition.
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