SmarTone, Hutchison Telecom to see gains after CSL acquisition
While the government reviews HKT's proposed acquisition of rival CSL New World Mobility, analysts see this consolidation in Hong Kong's mobile communications market as a boon to the remaining players.
While the government reviews HKT's proposed acquisition of rival CSL New World Mobility, analysts see this consolidation in Hong Kong's mobile communications market as a boon to the remaining players.
In a research note, Barclays described the US$2.42 million (HK$18.86 billion) deal as "a game-changer" that has prompted it to raise earnings estimates and price targets for SmarTone Telecommunications and Hutchison Telecommunications Hong Kong.
Anand Ramachandran, lead author of the report and Barclays' head of telecommunications, internet and media equity research for Asia, excluding Japan, said SmarTone and Hutchison Telecom would not show meaningful improvements in the next six months, but can expect "better earnings momentum in the second half this year and 2015".
On Monday, SmarTone issued a profit warning for its financial results in the six months to December 31.
The primary issue for the city's mobile network operators has been the maturing smartphone penetration rate. Data from the Office of the Communications Authority shows that there were 11.41 million 3G and 4G mobile subscriptions as of September in the city, which had a population of 7.18 million as of June last year.
Barclays said the intense competition has resulted in a "lackadaisical earnings momentum" because of lower tariffs and higher marketing, promotion and acquisition costs. Once the HKT-CSL merger is approved, it expects the remaining four players - including the local subsidiary of China Mobile - to see earnings revised for the next 12 to 18 months, driven by higher tariffs and lower marketing expenses.
HKT management indicated that the company's operating costs could be trimmed by 10 to 15 per cent after the CSL deal is completed.
Barclays' adjusted forecast for Hutchison Telecom revenue will see the company post HK$12.06 billion this year and HK$13.72 billion next year. Its share price target is HK$3.85. SmarTone is estimated to record HK$9.8 billion in revenue for its financial year to June and HK$10.13 billion the following financial year. Its price target is HK$12.80.
Barclays said HKT, the telecommunications arm of Richard Li Tzar-kai's PCCW, remains its top pick in the local industry. HKT is the smallest of Hong Kong's five mobile network operators, but it is buying a firm that has been the city's largest wireless services provider since 2006.
The purchase, subject to shareholder and regulatory approval and expected to close in March, would give HKT a dominant 31 per cent share of Hong Kong's mobile services market.
VC Brokerage director Louis Tse Ming-kwong said that the CSL acquisition could also serve as a catalyst for the other players to consider "more consolidation activity in the industry this year".
SmarTone shares advanced 0.58 per cent to close at HK$8.73 yesterday, while Hutchison Telecom shares finished up 2.14 per cent to HK$2.87.
