Salomon backs Asian telecom carriers
Salomon Smith Barney is upbeat on the Asia telecommunications sector due to the ability of carriers to generate strong free cash flow.
At the bank's second annual Asia telecom media technology conference, Salomon's managing director and head of regional telecommunications research Craig Irvine told fund managers to overweight the telecom sector in Asia but underweight elsewhere.
'We underweight the sector in Europe and the US. Asia is the only exception because of the free cash flow and the valuations,' Mr Irvine said.
Free cash flow is different from cash flow because it takes into account a company's debts, which means the net cash the company can generate from its operations.
Asian carriers' traditional conservative approach compared with European and American counterparts was a plus as it saved them from excessive investment in third generation mobile technology and, therefore, avoided the telecom bubble of the past two years, he said.
'We don't have the same kind of overhang [in Asia] that other countries did,' Mr Irvine said.
He said most Asian telecom carriers did not have a lot of debt and had stronger balance because they tended to use internal resources to finance capital expenditure instead of relying heavily on bank borrowings.
Asian telecom carriers' ability to generate positive cash flow therefore makes them look cheaper in valuation compared with elsewhere, according to Mr Irvine.
Salomon favoured South Korea and chose SK Telecom as its top telecom stock pick due to the successful launch of higher speed 2.5 generation wireless data transmission services.
Salomon expects the 2.5G service to add premium to Korean telecom carriers because of the ability to enhance their average revenue per user.
Salomon is cautious about China's telecom sector because of the uncertainty of issuance of new mobile licences in the next couple of years.
Although the investment bank ranked China Mobile to outperform - due to the dominant wireless phone carrier's strong free cash flow - it advised investors to be positive but cautious because the sector would be hammered by the overhang of the licence issue.