From 6 To 3



As the leading mobile services provider in Mainland China, the Group boasts the world's largest unified, contiguous all-digital mobile network and the world's largest mobile subscriber base. The principal activities of the Group are the provision of mobile telecommunications and related services in thirty-one provinces, autonomous regions and municipalities of the PRC.

China Mobile (0941) shares plunged 8.6 percent yesterday on concerns that the giant's monopoly will be shattered by Beijing's telecoms restructuring plan. The central government ordered the nation's six telcos to merge into three in a move to reduce China Mobile's dominance in the world's largest market. China Mobile shares plunged to HK$114.90, down HK$10.20 per share. However, almost all investment banks except Goldman Sachs are bullish on the outlook for China Mobile.

Goldman is cutting its estimates to reflect rising threats going to be faced by the telco. It looks to be heading into a uniquely unfavorable regulatory regime, with policies like inter-operator roaming seriously threatening its many advantages. Merrill Lynch recommends investors buy the stock at the "tempting" level of HK$115 and flashes a "screaming buy" at HK$110. Australia-based Macquarie Bank holds a similar view. "Significant changes to the competitive landscape are at least 12 to 18 months away. So we see substantial share price upside from current levels," the bank said, setting a target price of HK$165 that represents a premium of 43.6 percent on yesterday's close. In the long run, however, the bank expects China Mobile's market share to fall to 67.6 percent in 2012 from the current 73 percent when the restructuring begins to take effect.

But Morgan Stanley believes the other two telecom operators will pose little threat to China Mobile which has nearly 400 million customers in a country with almost 600 million mobile phone users - nearly double the entire population of the United States.

Investors who have bought shares in China Unicom (0762), China Telecom (0728) and China Netcom (0906) are at a funk.

Shares in the three telcos have been suspended for two consecutive trading days, and no notice has been given how much longer investors will have to wait before they resume trading.

Some investment banks say the suspension could even last for a week pending management reshuffles among the companies, while the market is also concerned with what price China Telecom (0728) will pay to acquire the CDMA business from China Unicom (0762).

At the end of the day, the 6 into 3 basically is hastening and bringing forward the way the industry will develop in the future. Only the big will survive. Instead of allowing the 6 to replicate infrastructure, it is more efficient to have just 3. Out of the 3, China Mobile is still miles ahead with or without any partnerships or M&A. As it is a government policy, the M&A will be at fair prices. This 6 into 3 policy actually favours China Mobile big time as no one has their economies of scale. At HK$115, its a great short term, medium term and long term buy.

Despite the rumblings at home, China Mobile was likely to bid for MTN, which has 21 operations in emerging markets in Africa and Middle East - collectively MTN has more than 70m mobile subscribers. China Mobile should make its bid following news that Bharti will buy a 51% stake in MTN for US$19bn - uncomfirmed. However the company has come to say it will not be bidding for MTN - well, wait and see. China Mobile's strategy seems to be to increase global competitiveness and coverage, and at the same time expanding the TD-SCDMA footprint outide China. The TD-SCDMA is a home grown technology which China wants to export, promote and develop - rather than beholden to some foreign technology platform forever. Hence it will want to conquer via acquisitions in areas that are not tied up with WCDMA and CDMA2000 technologies. That means China Mobile will be aggressive in Asia, the Middle East and Africa. Hmmm, TMI looking more attractive by the day.

China Mobile's ROE 26%-30% a year for the last few years and the next few projected years ahead. Net cash position. Trading at 18x 2008 earnings (HK) and 15x 2009 earnings. Even has dividend yield now at 2.4%, to rise to 3% next year.

p/s photos: Fiona Xie & Michelle Saram

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