Shares in mainland operators surge as long-awaited restructuring nears Mainland mobile-telephone operators, whose shares have surged in the past month on rumours that a long-awaited restructuring will go ahead as early as next summer, have had their price targets raised by leading banks and brokerages. CLSA, JPMorgan and Citigroup all stated that the telecommunications sector restructuring was more likely to take place as early as March or April next year. All emphasised that mobile players would remain a growth engine as consumers make the switch from fixed-line links. A restructuring of the mainland telecommunications sector - expected to cut the number of operators to two or three from the present four - has been rumoured for over two years. Any shake-up has been considered likely to prefigure an issue of licences for third-generation mobile phone networks. China Mobile, the largest mobile operator, has indicated that it expected the licences to be issued before the Beijing Olympics next August. All operators surviving after the restructuring are expected to be able to provide both fixed-line and mobile services. The prospect of fixed-line operators capturing a share of the mobile market has helped shares of China Telecom Corp gain 50 per cent this year to HK$5.98 yesterday, after hitting an intraday record high of HK$7 last week. China Telecom is the largest fixed-line operator in the country. Its smaller rival, China Netcom Group Corp, has gained 15 per cent despite the company's poor operating results in the first half. The smaller of the mobile operators, China Unicom, which it is rumoured will be split up under the restructuring, has benefited from the recent share price rally, for the first time since November 2000 rising above its June 2000 initial public offering price of HK$15.58 and closing yesterday at HK$15.60. Shares of China Mobile, the mainland's dominant mobile-telephone operator and largest company by market capitalisation in the benchmark Hang Seng Index, have, meanwhile, surged 94 per cent this year on the back of strong subscriber growth. The company added 42 million users in the first eight months this year, bringing its total to 343 million. The prospect of greater competition in the mobile sector is not reducing investor interest in China Mobile. Citigroup yesterday raised its price target to HK$158, or a valuation of 25 times its estimated profit for next year, from HK$111, or a PE ratio of 21.7 times forecast earnings. The broker estimated 29.8 per cent net earnings growth for China Mobile this year. 'Until the regulatory change impacts, which we think will be 2009 at the earliest, there is no questioning China Mobile's fundamental strength. We see a 40 per cent earnings growth in 2008,' Citigroup analyst Michael Meng said. The company was the premier mainland consumption play as it served one-third of the population, he said. Unicom, rumoured to be the focus of the restructuring, operates both GSM and CDMA mobile networks. The market has speculated it will be broken up or merged with either China Telecom or Netcom in the shake-up. Citigroup set its one-year price target for Unicom at HK$22, from HK$15.49 previously, reflecting the strong momentum in the mobile sector. JPMorgan raised its Unicom price target to HK$16.50, with a rating upgrade to neutral from underweight. The bank forecast that Unicom's GSM user base would grow 2.2 per cent next year, and its CDMA subscriber numbers would remain flat, based on the assumption that the mainland would have only three mobile operators after restructuring, namely China Mobile, Unicom's GSM and Unicom's CDMA. China Telecom and Netcom might be the new owners of Unicom's networks after the restructuring, JPMorgan said. China Telecom may acquire Unicom's CDMA operations to stimulate growth. China Telecom had a net loss of 380,000 fixed-line customers in August, for a total of 224 million users. The company may be overvalued at its present share price, according to some analysts. 'We don't believe that any restructuring is likely in the foreseeable future and the current restructuring plan is flawed,' CLSA telecommunications analyst Francis Cheung said. 'The government will need to come up with a new plan, which will not be easy, especially with a new generation of leaders coming on board with the 17th congress of the Chinese Communist Party.' Mr Cheung said China Telecom's surge in the last two weeks might be due to investors treating the stock as an attractive substitute for China Mobile due to its cheaper valuation.