China Unicom shares soar on Spain deal then plunge

PUBLISHED : Tuesday, 25 January, 2011, 12:00am
UPDATED : Tuesday, 25 January, 2011, 12:00am

Shares of China Unicom (Hong Kong) reached a two-year high in early trading before falling sharply a day after the mainland's second-largest telecommunications network operator expanded its strategic alliance with Spanish carrier Telefonica.

Unicom, which had agreed with Telefonica to buy an additional US$500 million stake in each other, yesterday saw its shares slip 0.65 per cent to close at HK$12.26.

The early initial burst of enthusiasm saw the Beijing-based company's shares rise up to 3.9 per cent to hit HK$12.82, the highest intraday level since September 8, 2008.

In a research note, analysts at Deutsche Bank said: 'We have not seen material forms of synergy emerge between foreign operators and their Chinese partners over the past several years.'

The analysts, who maintain a 'hold' rating on Unicom stock and a target price of HK$11.34, cited as examples British carrier Vodafone Group, which sold its 3.2 per cent stake in China Mobile for US$6.5 billion in September last year, and South Korea's SK Telecom, which sold back to Unicom its 3.8 per cent in the mainland carrier for about HK$10 billion in November 2009.

Unicom chairman Chang Xiaobing and Telefonica chairman Cesar Alierta, who signed the new agreement on Sunday, said co-operation would increase in areas such as equipment purchases, mobile service platforms, roaming, technology and service to multinational corporations and wholesale carriers. Their new deal followed one forged in September 2009, when the two sides agreed to invest the equivalent of US$1 billion in each other. The two operators have a combined customer base of 590 million worldwide.

In a filing with the Hong Kong stock exchange, Unicom said it would raise its interest in Telefonica by buying 21.8 million shares at an agreed value of Euro17.16 (HK$182) per share. Its stake in the Madrid-based operator, the world's third-largest after China Mobile and Vodafone, will grow to 1.37 per cent from 0.89 per cent.

Telefonica will boost its stake in Unicom to 9.7 per cent, from 8.37 per cent, by buying about 317 million ordinary shares from third parties over the next nine months.

'This is consistent with Telefonica's previous comments that they would look to increase their shareholding in Unicom to around 10 per cent,' said Macquarie Securities analyst Lisa Soh, who maintains an 'outperform' rating on Unicom and a target price of HK$12.34.

Deutsche Bank analysts said Telefonica's share acquisition schedule 'could provide minimal support to Unicom's share price'.

Unicom, Apple's sole mainland carrier-partner for the iPhone, reported a 73 per cent fall in net profit to 744 million yuan in the three months to October last year after spending 1.82 billion yuan on 3G handset subsidies. Its ebitda - earnings before interest, taxes, depreciation and amortisation - margin fell 0.5 points to 36.3 per cent in the first half of the year.