CTHK assessment little to do with fundamentals

PUBLISHED : Saturday, 04 October, 1997, 12:00am
UPDATED : Saturday, 04 October, 1997, 12:00am

The great wall of silence ordered on the huge China Telecom (Hong Kong) (CTHK) underwriting syndicate has meant little in the way of dissenting debate on the listing has been heard, in public at least.

The prospect of missing out on future business with the Ministry of Posts and Telecommunications (MPT) is a big disincentive to picking holes in its soon to be listed arm.

The issue has plenty of eye-catching elements - the biggest flotation in Hong Kong and the first time the mainland has allowed direct foreign equity ownership in the telecoms service sector. CTHK owns cellular networks that have a combined 98 per cent market share in Guangdong and Zhejiang - a near monopoly that is not likely to change for several years.

The company is on its international road show with its bankers touting the stock at an initial price range of $7.75 to $10. With a full over-allotment issue and a sale of the shares at the top of the range, it would raise $2.99 billion and value CTHK at $120 billion. This would make it the eighth-biggest company listed in Hong Kong by market capitalisation.

Twenty-five per cent of the company is on offer but 12 corporate strategic investors will get nearly 10 per cent. These investors - including Henderson Investment, New World Development, Cheung Kong, Hutchison, and Kerry Holdings, have committed not to sell their stakes for at least a year. This means in effect the free float of the company is 15 per cent, about 1.8 billion shares including the over allotment. Of this, only 140 million are being offered in Hong Kong.

The prospect of a Beijing Enterprises-type frenzy looms. Market talk suggests a grey market opening figure of $17. Were this to happen CTHK would be catapulted to being Hong Kong's fourth-largest company, bigger than Hongkong Telecom. Not bad for a mobile telephone company with 2.8 million subscribers.

Mobile penetration rates are still low, with about 2.29 per cent in Guangdong and 1.09 per cent in Zhejiang. Some forecasts reckon this could hit 10 per cent by 2001. The problem here is that it is a general rule of telecoms that every additional subscriber on a mobile network is worth less to the company than the one before. Prices of airtime, connection fees and handset prices will have to fall to encourage this growth.

The mainland already has the lowest airtime rates in the world. In effect the company could be filling up its capacity with low or no margin customers. So while consumer numbers balloon, profit growth actually slows.

Other questions about its relationship with the MPT loom. Interconnection fees, the hiring of leased lines and new subscriber commission fees, all controlled by the ministry, are ways the parent could choose to syphon more cash out of its offspring should it desire.

But let us not pretend, investors are not assessing CTHK on its fundamentals. This is clearly a red-chip asset injection story. Talk is already of which other mobile phone operations will be injected into the company. China has cellular operations in 31 other provinces to choose from. Fujian is already being touted as a possible first candidate.

Geographically this would make sense as it connects both Guangdong and Zhejiang along the wealthy eastern coastal strip.

The company has also been granted an option to acquire the MPT's 51 per cent interest in Great Wall Communications when its mobile operations turn commercial in Guangdong and Zhejiang. Though an experimental network has been running in Guangdong, the company has not yet received official go-ahead to roll out.

At least one brokerage has awarded CTHK a red-chip premium of $38 billion above the value of its on-going operations, which it reckons is worth $83.5 billion. What is thought to be the lowest of the analyst valuations makes the company worth $68.1 billion, smaller than Citic Pacific. Few believe that that situation, should it happen, would remain for long.