Broker's View

Telco troika to see gradual recovery, but Unicom continues to lose ground on larger rivals

After weathering lower tariffs imposed by the regulator, China’s three largest operators now appear to be dialling up the right numbers

PUBLISHED : Wednesday, 20 July, 2016, 6:27pm
UPDATED : Wednesday, 20 July, 2016, 10:46pm

Industry analysts expect earnings by China’s three telecommunication service providers to gradually recover this year, but the gap between the smallest operator and its two rivals will continue to widen.

The domestic market is dominated by China Mobile, China Telecommunication, and China Unicom, in that order, but all have been hit hard in recent years after being forced into massive cuts in tariffs by the regulator, in an effort to make 3G and 4G services more affordable to subscribers.

“That mission by the regulators is almost completed, and the risk of any further tariff intervention is diminishing,” Jefferies equity analyst Elaine Lai wrote in a note.

She now expects the market leader, China Mobile, to deliver the strongest cash flow trajectory of the three, as it starts to reap the benefits of huge investment in 4G.

With a 54 per cent market share by revenue, the analyst expects China Mobile to report 701.32 billion yuan (HK$812.0 billion) in revenue this year, up 4.9 per cent year on year, whereas net profit may dip 9.7 per cent to 108.54 yuan.

That mission by the regulators [to make 3G and 4G services more affordable to subscribers] is almost completed, and the risk of any further tariff intervention is diminishing
Jefferies equity analyst Elaine Lai

Lai’s note suggests the company’s performance will certainly be boosted by what she described as largely benign competition.

China Telecom is only due to launch its VoLTE 4G technology (Voice over Long-Term Evolution) in 2017, and in third place China Unicom is still recovering from a management shake-up, and a late start into 4G.

“Its peers should catch up from 2017 onwards, but we expect China Mobile to maintain its lead as network quality is critical in this race,” Lai said.

China Telecom’s future is also bright, after already generating huge value from the creation of China Tower Co, a joint venture between the three operators.

While contributing just 20 per cent of its assets, its now has a 28 per cent stake in the business.

Lai said China Telecom also has the most balanced business mix among the three.

China Mobile’s vice-president Sha Yuejia said in May that initial public offerings of both A-shares and H-shares in China Tower are scheduled for next year.

As the smallest player, the gap between China Unicom and the other two rivals is still growing, UBS Securities analyst Wang Jinjin said in a research report, and he expects that to widen further.

His prediction is Unicom will see a 0.9 per cent year on year fall in revenue in the first half due to its late start into 4G and its fewer base stations, becoming the only large operator to saw its mobile service revenue fall.

Its market share may drop too, to 20.6 per cent this year from 21.1 per cent in 2015, Wang said.

Jefferies’ Lai said Unicom with have an even-tougher full year, with annual profits likely to plummet 77.4 per cent to 2.38 billion yuan, on revenue of 277.05 billion yuan, 6 per cent down.

The company’s underperformance is down to a combination of issues.

As well as the imposed tariff issue and its slow reaction to developing a 4G business, it has continued to leak subscribers, and was hit by an anti-corruption investigation involving its chairman Chang Xiaobing.

After Chang was replaced at the top by China Telecom’s chairman Wang Xiaochu in August last year, he was investigated in December, largely due to his business operation in Unicom.

As Unicom collaborates closely with China Telecom under its new leader, Lai is hopeful of an earnings rebound by the second half of 2017 or first half of 2018.

“Although the new chairman has been executing the right strategies since he got on board in August, we do not expect the company’s earnings to go back to 12 billion yuan (the level in 2014) within the next three years,” Wang from UBS said.