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.

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.