WHAT THE BROKER SAYS
Merrill Lynch says it is upgrading its recommendation on China Unicom, the mainland's No2 mobile operator, from sell to neutral as the likelihood of a break-up of the company reaches 50/50.
It says the share price is based on its asset/strategic value versus its ability to generate earnings/cash flow as an ongoing entity.
Since late November an increasing flow of data from Beijing indicates that the authorities have accepted the idea that the future of Unicom must be settled to rationalise the telecoms industry before 3G issuance and to save 3G capital expenditure.
Clearly Unicom is underperforming. While trading at a slight premium to China Mobile and China Telecom on a price/earnings basis, Unicom is at a discount to China Mobile and China Telecom on value/earnings before interest, taxes, depreciation and amortisation and price to book.
A key question is that in the event of a break-up how will the regulators treat minority shareholders?
The risk is that poor operating results could add momentum to the argument that Unicom's book value is to be written down, potentially impairing its net asset value.
The broker has reduced its estimate of earnings per share for the second half of 2004 from 20 fen to 19 fen and for 2005 from 45 fen to 44 fen.
The counter closed at $7 on Friday.
