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China Telecom sets pace

China Unicom

China Telecom led a narrow market to fresh highs yesterday on positive sentiment towards the mainland play and with the support of leading property counters.

The Hang Seng Index ended 186.58 points, or 1.22 per cent, stronger at 15,461.11 after reaching a 27-month intraday high of 15,581.96.

Turnover was $9.8 billion, with China Telecom seeing the most active trade at $1.03 billion.

The telecommunications stock ended 6.71 per cent stronger at $41.30, down from a session high of $43.50.

'There is no main issue,' HSBC analyst David Gibbons said of China Telecom.

'There was talk of a warrant issue . . . it seems to be technical, not fundamental.

'I think the whole telecoms sector is very fluid at the moment both here and globally.

'China Telecom is valued mid-way between Asian and Western peers . . . at the moment, it could still rise further.' China Telecom is the best performing blue chip this year, rising 208.2 per cent.

The stock last week surged on a rumour that it would be included by Morgan Stanley Capital International (MSCI) in one of its Asian indices but the counter dropped back when the MSCI announced this was not the case.

Analysts also said yesterday that a report last week that mainland authorities had warned China Telecom and fellow telecommunications giant China Unicom to stop their price wars could have contributed to China Telecom's strength.

'If you stop a price war, then your [profit] margins are going to increase,' a dealer said.

Credit Suisse First Boston sales trader Jonathan Gurnsey said the brokerage had upgraded its 12-month price forecast for China Telecom from $40 to $50 - a big leap but a viable target.

'It's (the price) crazy and it's hot and should be sold off and I don't like running with the crowd, but . . . [after being in] the States, I get the feeling that what we are seeing is early days of rerating,' Mr Gurnsey said.

'So I think . . . it's going to keep running.' Goldman Sachs said in a report earlier this month that it had a 12-month, $42 price target for the stock, saying the 'investment story' on the stock was unique.

Celestial Asia Securities director Eugene Law Ka-kin said China Telecom was the market favourite, possibly because of the benefits of mainland entry into the World Trade Organisation.

However, he said the stock was 'not cheap at all'.

'Looking at the PE (price-earnings) ratio, it's hard to justify that [price],' he said.

He said the company was trading on 57.3 times estimated earnings for this year.

Other blue chips which rose yesterday included Sun Hung Kai Properties, by 2.24 per cent to $68.25, and Great Eagle, 10.27 per cent to $13.95 (Stock Split, Page 12).

Brokers said the announcement on Friday that Hong Kong's gross domestic product grew a better than expected 4.5 per cent year on year in the third quarter was a positive for property stocks.

'The numbers on Friday were tremendous,' Paribas Asia Equity research head Simon Irwin said of the GDP figures.

In the broader market, computer maker Legend jumped 15.31 per cent to $18.45, with brokers attributing the gains to its announcement last week of a new portal set up in co-operation with China Telecom.

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