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When China Telecom rings, hang
up
By Gary LaMoshi
HONG KONG
- Although the news was all bad last week - bombs in
Bali, Zamboanga and Manila, nukes in North Korea - it
did feel like old times in Asia. The rush of events
shining the world's spotlight here recalled those heady
days before the crash of '97, when Asia felt like the
center of the universe.
Stoking last week's wave
of nostalgia, an Asian market leader reached out to
overseas investors with a US$3.68 billion stock offering
in New York and Hong Kong. China Telecom hit The Street,
and Exchange Square, with the road show for its initial
public offering (IPO), the world's third-largest this
year.
As I said, it was a week for bad news.
China Telecom is the mainland's biggest
fixed-line operator and, with 128 million users, the
world's largest by that count. The company has 53.2
million lines in service, third on the globe behind US
leader Verizon and Japan's NTT and at current growth
rates will overtake them both next year.
Dial
M for monopoly
Created in last year's breakup of
the former monopoly of the same name into a pair of
regional carriers, China Telecom's service areas in 21
southern tier provinces include prosperous Shanghai
municipality and Guangdong province. The stock offering
features those two regions plus Zhejiang and Jiangsu
provinces, with the prospect of purchasing additional
service areas from its parent later.
Looking at
the numbers, the only sizzle you'll find in China
Telecom is on its phone lines.
Set to begin
trading in early November and priced between HK$1.48 and
HK$1.78 (US$0.19-0.23) per share, the offering comes in
slightly above book value - China's regulators block
offerings below book value - at 10.5-11 times current
earnings. That's around the P/E (price to earnings) for
China Mobile, the leading mobile-phone company that
listed five years ago.
China Telecom lifted its
projected dividend payout to HK$0.065, a yield of
3.6-4.l percent, to entice investors. The dividend
compares favorably with the zero percent offered by Hong
Kong's PCCW (See AOL's Asian cousin, October 10) and
less than 2 percent at similar former monopoly Korea
Telecom. Australia's Telstra, on the other hand, yields
better than 4 percent and is less of a gamble.
China Telecom initially hoped to keep the
dividend payment below 20 percent of profits; the
increased yield represents a 35 percent payout.
Significant dividend hikes look unlikely over the next
few years, given the rich starting point and China
Telecom's aggressive expansion plans.
Goin'
mobile
In addition to plans to inject more
service areas, China Telecom wants to enter the booming
mobile-phone business. Average annual growth in the
mobile-phone market for the past five years was a
stunning 85 percent (fixed-line growth averaged less
than 30 percent). By next year, China will have 210
million mobile-phone users, outnumbering their
fixed-line counterparts. China Telecom wants to join the
new game that's already leaving it in the dust.
Analysts say China Telecom's IPO won't raise
nearly enough money to build a third-generation mobile
network, which would give it a technology edge over
current players China Mobile and China Unicom, which
also trades on Wall Street. Of course, there's little
evidence that consumers want 3G at this point, though
the technology and offerings remain in their infant
stages.
In an indication of prudence or
realization of the limits of its finances and of
investors' tolerance, China Telecom has pledged that it
won't spend more than US$2 billion to satisfy its mobile
itch. (Ever?) It also told fund managers it favors a
2.5G system that can win customers now and, if
warranted, can be upgraded to 3G.
In the telecom
industry's version of the dot-com bubble, excessive
enthusiasm for 3G led to overbidding in license auctions
and overcommitment in investment to build new networks,
sending the sector into a nosedive that shows little
sign of reversal. The Dow Jones Telecom index has fallen
about 80 percent over the past two years.
Recent
local evidence that telecoms still aren't flavor of the
month includes China Unicom's fast-sinking offering on
China's domestic stock market and a canceled European
bond issue by Hutchison Whampoa, leading Hong Kong
tycoon Li Ka-shing's communications conglomerate. China
Mobile shares are down 34 percent this year, Unicom's
down 51 percent.
China Telecom's lead
underwriter Merrill Lynch, which had to eat 16 percent
of an offering by Singapore's Chartered Semiconductor
this month, sent dozens of institutional investors
glowing pro forma numbers inadmissible in the legal
prospectus, stating Telecom's pegging offering price at
six to eight times projected 2003 earnings and giving
Merrill's accounting the company's seal of approval.
China Telecom quickly moved to spike the e-mail and
issued a non-denial denial of the information, urging
investors to forget all those hot numbers they'd just
read. Goldman Sachs and its IPO client PetroChina pulled
this same stunt a couple of years ago.
Running with the big dogs
The Merrill
e-mail that never happened further contended that China
Telecom faces fewer regulatory issues than mainland
mobile operators. A commentary in China Daily also
talked about regulators, noting that, sure, China
Telecom wants that IPO money, but what it wants even
more is political clout.
China's
telecommunication industry remains firmly under the
thumb of government regulation. China's phone rates rank
among the highest in the world; they've got nowhere to
go but down. (In deregulated Hong Kong, they rank among
the lowest, particularly in the lively international
calling market.)
According to China Daily - and
the government's house organ ought to know - regulators
display greater respect for overseas listed companies
and are less apt to bully them. For example, the
commentary cites the Ministry of Information Industry
making a swift decision to withdraw plans for one-way
charges on mobile calls, which would have ended fees for
receiving calls and cratered revenue for China Mobile
and Unicom. On the other hand, regulators eliminated
fixed-line operators' lucrative connection charges.
The takeaway here, as they say in those
road-show PowerPoint presentations, is not that China
Telecom may get a few more goodies from civil service
mandarins after its IPO; it's that all Chinese telecom
companies, and just about every other business in the
big motherland, remain at the mercy of the Communist
Party bureaucracy (see Enter the dragon ... at your own
risk, September 26).
Yes, thanks to
World Trade Organization membership and consumer
pressure, some day telecom-market regulation in China
will ease. When it does, China Telecom will lose out to
nimbler competitors, as have other former phone
monopolies, including PCCW's HKT and AT&T in the
United States. Until then, investors have the comfort of
knowing that some bureaucrat in Beijing makes the real
decisions about the return on their stock. Not to
mention that, as a state-owned company, China Telecom's
real board of directors is not those smiling faces in
the slick annual report, but the Politburo, with Hu
Jintao soon to take over the chairman's seat. Those
fellows make Enron's board look like the best friends a
stockowner ever had.
When China Telecom, or any
other state company, rings for money, smart investors
hang up.
(©2002 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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