China Unicom and Netcom likely to join forces China Unicom and China Netcom Group Corp are likely to emerge as winners in the revamp of the telecommunications sector once they join forces to challenge the dominance of their bigger rivals, market analysts say. The restructuring plans are likely to preserve China Mobile's dominant position in the market but China Unicom, the smaller of the two mobile-phone operators, could gain if it offloads its smaller CDMA network operation to a fixed-line operator, the analysts say. The government has studied various plans aimed at creating a relatively fair market landscape as China Mobile's dominant position gained more strength in the past two years. The restructuring as now envisaged would most likely create three full-service operators that could offer both fixed-line and mobile services. Under the proposal, China Mobile would acquire a fixed-line operation from China Tietong; top fixed-line player China Telecom would acquire a CDMA mobile service which has about 40 million users; and China Unicom's GSM network, with more than 117 million users, would merge with China Netcom, the smaller of the two main fixed-line operators. Zhang Chunjiang, chairman of China Netcom, earlier this year said the proposed industry restructuring would lead to a more level playing field in the market. 'The four operators are owned by the government, and the government does want the four growing up well,' Mr Zhang said. 'The fact is that China Mobile is growing much better than the remaining three. The government should help us to catch up with China Mobile's pace.' A market source said China Mobile would then face more competition from the new China Telecom and the merged entity of China Netcom and China Unicom but the new firms still would not be in a position to challenge China Mobile's dominance in the market. 'Basically [the restructuring] is negative for China Mobile. But with its market capitalisation of HK$2.74 trillion, it's already six times bigger than China Telecom which has a valuation of HK$462.9 billion. So even after the addition of a mobile business for China Telecom it won't boost its valuation too much,' an industry source said. China Unicom, which is going to sell its CDMA network and merge its GSM business with China Netcom, is regarded as the player to benefit most from the restructuring. 'China Unicom should be in a better position [to gain from the revamp] as it can ask for a higher bid price for the mobile network assets,' said Wong Chi-man, a telecommunications analyst at China Everbright Securities. However, the government's possible intervention in the transaction may affect China Unicom's valuation. 'If such transactions are not market-driven and lead to a lower valuation of Unicom's mobile assets, the deal may face a challenge from minority shareholders in Hong Kong,' said Marvin Lo, an analyst at Daiwa Institute of Research. Once China Unicom successfully offloads the CDMA network, it would become a single GSM network operator and may be merged with smaller fixed-line play China Netcom. 'It would be perfect for China Unicom to keep the profitable GSM network and naturally it would upgrade to WCDMA 3G standard which is the most adopted 3G standard globally,' said Mr Lo. China Netcom, which is now only a fixed-line player in the northern part of the country, trades at 12 times historical earnings due to perceived lack of growth potential. 'It's the cheapest play among the four telecom plays in terms of valuation,' said Mr Lo. 'But the future of Netcom will be based on the consideration of the deal.' Goldman Sachs estimates that China Netcom will add HK$1.99 per share if it merges with China Unicom's GSM network. China Telecom, which provides fixed-line services in southern China, expects a CDMA licence would close the gap with China Mobile, but it is still a long way to beating its giant rival, analysts say. 'China Telecom may not benefit much from the CDMA operation, as it is too small when compared with its 100 million users of fixed-line business,' said Kelvin Ho, a telecommunications analyst at Nomura Securities. 'The company should be following organic growth of its broadband business rather than the mobile business.' CLSA estimated that China Telecom's valuation would be boosted by 90 billion yuan, on top of its existing valuation of 430 billion yuan at HK$4.50 per share. Shares of the four listed mainland telecommunications plays have surged this year as investors bet on the restructuring concept. China Mobile's stock has doubled while China Unicom and China Telecom outperformed the market by surging 35 per cent and 37 per cent, respectively. China Netcom rose 16.4 per cent. 'Restructuring plans are coming in, providing different solutions. The linchpin is to secure a rapid growth of the sector and bring more benefits to people,' Deputy Minister Lou Qinjian of the Information Industry said in one of the last major official statements on the restructuring plan in October.