China Telecom (Hong Kong) (CTHK) is to buy its parent's mobile telephone assets in Jiangsu province for HK$22.47 billion, a record for a red-chip asset injection. CTHK will pay in cash and assume China Telecom Jiangsu Mobile's US$30 million in debt. The company had reserves of 35 billion yuan (about HK$32.58 billion) at the end of last year. News of the deal came after the local market closed. In Hong Kong, CTHK shares earlier rose 30 cents to HK$15.35 while in London yesterday they were up a further 27.5 cents at HK$15.625. The shares were floated at HK$11.68. Jiangsu Mobile management is forecasting net earnings of 1.25 billion yuan this year. CTHK will therefore pay about 19.2 times those estimated net earnings for the assets and 7.3 times estimated earnings before interest, tax depreciation and amortisation expenses (Ebitda). The company signalled some time ago it wanted to buy Jiangsu Mobile's assets but had to wait until a six-month post-listing moratorium on corporate activity passed last week. In its initial public offering in October, CTHK was sold to investors at 24 times earnings and 10.6 times Ebitda. Chairman Shi Cuiming said the price for Jiangsu Mobile was attractive relative to the quality of the assets. 'Other international cellular operations trade at 10 times Ebitda,' he said. At the end of last month, China Telecom's subscriber base in Jiangsu province was 1.04 million customers, although penetration was low, at about 1.24 per cent. At face value, Jiangsu represents even more of a possible growth story than CTHK's operations in Guangdong and Zhejiang provinces. Jiangsu is the third-wealthiest province measured by gross domestic product per capita, and, with a population of about 71 million, has fractionally more people than Guangdong. Net new subscriptions this year in Jiangsu were running at 50,000 a month, CTHK said. The compounded annual growth rate of subscribers between 1995 and last year was 95 per cent. Jiangsu is the third-largest mainland cellular market after Guangdong and Zhejiang. The Jiangsu purchase will catapult CTHK into an even more dominant market position. As of March 31, including Jiangsu Mobile's subscribers, it had 4.8 million customers, equivalent to 31 per cent of the mainland mobile market. Daiwa Securities (HK) analyst Zeus Chen said he thought the deal was fair. 'The [approximately] 20 times earnings figure is at the high end of market expectations, but looking price-to-cash flow it looks more attractive.' As with its operations in Guangdong and Zhejiang, CTHK has bought the Jiangsu rights to operate at both 900Mhz and 1800Mhz frequencies. CTHK said it planned to spend about US$1.2 billion on upgrading Jiangsu Mobile's networks before the end of 2000. Of that, US$625 million would be spent this year with US$290 million earmarked for next year and 2000. CTHK plans about US$2 billion in capital expenditure this year in the three provinces in which it operates. Jiangsu Mobile clearly will not be the last asset injection into CTHK. Its stated strategy is to look to buy more cellular assets from parent China Telecom when the 'timing and conditions' are right. CTHK vice-chairman Chen Zhaobin said it was difficult to talk about precise targets. 'The principle is that acquisitions need to be beneficial to shareholders and profitable,' he said. The company is thought to be considering other provinces and municipalities on the richer eastern seaboard, including Fujian and Shandong, and Beijing and Shanghai.