Why government policy has a bigger impact on China’s telecoms industry than market competition
Expectations of a moderately good year for investors in China’s “big three” telecommunications service providers may have been thrown out of the window this week, following Premier Li Keqiang’s call to accelerate the pace of network performance upgrades and tariff reductions across the country.
The U-turn in investor sentiment can be traced to what is known as national service, which compels state-owned telecommunications companies to put the government’s development goals ahead of their market interests.
In his presentation of this year’s Government Work Report to the National People’s Congress last Sunday, Li directed China Mobile, China Unicom and China Telecom to remove all domestic long-distance and mobile roaming fees by the end of this year, significantly cut internet connection and leased line charges for small and medium-sized enterprises (SMEs), and reduce international long-distance tariffs.
Less than 24 hours later, all three Hong Kong-listed network operators rushed to make separate regulatory filings to pledge their commitments to the latest iteration of Li’s ambitious “raise speed, drop prices” initiative, which he introduced in 2015.
The three companies, with a combined 1.3 billion mobile subscribers as of January 31, affirmed that they will cancel domestic long-distance and roaming fees from October 1, as well as substantially lower dedicated internet tariffs for SMEs and cut international long-distance rates.
Investors appear concerned that this move suggests another year of minimal earnings growth for those three operators, as they pursue national service, according to analysts.
It is a worry because China Mobile, Unicom and China Telecom pointed out in their recent filings that this new round of tariff reductions would impact their financial performance this year to a certain extent.
“We believe this development will translate into an earnings downgrade pressure for the three Chinese telecommunications network operators this year,” Jefferies equity analyst Edison Lee told the South China Morning Post.
Those recent filings made by China Mobile, Unicom and China Telecom also showed that they were not prepared to give guidance on the financial impact of speeding up tariff reductions across the mainland, according to Lee.
“There’s a lot of work to do for these operators because they need to identify and deliver competitive tariff packages for each province that would appeal to consumers,” he said.
The central government’s pressure for lower prices, higher speed and better coverage is a strategic part of China’s 13th Five-Year Plan for telecommunications, media and technology.
It targets ubiquitous high-speed internet access in cities, rural areas and impoverished villages by 2020. It also encourages telecommunications network operators to charge concessionary rates to low-income users.
Under that plan, the government has stated that it would “optimise” its evaluation criteria for the senior management at the three telecommunications network operators by factoring in their “social obligations”, Lee said.
“In other words, the government understands that the telecommunications network operators have to do national service. Therefore, it will accept if these companies do not meet the target returns and growth rates set by the State-owned Assets Supervision and Administration Commission (Sasac),” he added.
Sasac is a special commission authorised by the State Council to supervise and manage all state-owned assets, excluding financial enterprises, that are under the central government. It is also responsible for pushing forward reforms at state-owned enterprises.
As part of the 13th Five-Year Plan, the Ministry of Industry and Information Technology (MIIT) released in January a capital expenditure target of 2 trillion yuan (US$289.3 billion) for telecommunications infrastructure investments between 2016 and 2020.
The previous Five-Year Plan, from 2010-2015, achieved 1.9 trillion yuan in capital spending, which was 4 per cent below what the central government targeted.
“That means there will be no reduction in capital expenditure in this decade versus the consensus expectation of a fall in the next few years,” Lee said.
Other analysts see limited impact to the three telecommunications network operators from the further tariff reductions announced by Li.
“China Mobile and China Telecom started migrating customers onto roaming-free packages at the start of the second half of 2016, while Unicom removed roaming charges and long-distance call rates from all its post-paid packages from October 1 [last year],” Deutsche Bank analysts Peter Milliken, James Wang and Alan Hellawell said in a research note this week.
“Bringing down overseas roaming charges has been a constant drive by China Mobile, in particular, over many years.”
They pointed out that the reduction to SME access charges could be in the form of free speed upgrades, which may already be in the investment plans of the three telecommunications operators.
In a report this week, analysts at Morgan Stanley said a “30 per cent to 40 per cent annual reduction in unit pricing” was already expected by the market, so they predicted “limited incremental revenue loss”.
Li’s tariff-reduction push in 2015 “involved direct regulatory intervention on unit pricing for the core 4G and residential broadband services” on the mainland, the Morgan Stanley analysts said.
While investors may fret about the downside of the central government having a high degree of control over mainland China’s telecommunications market, the reality is that telecommunications is a regulated industry.
“This problem isn’t unique to China,” Bernstein Research senior analyst Chris Lane said.
“European operators have faced declining termination rates and roaming rates for years,” Lane said. “Incumbent telecommunications service providers in Singapore, Australia and New Zealand lost control of their monopoly fixed-line networks in favour of highly regulated independent next-generation network operators.”
Already the world’s second-largest economy, mainland China leads the world in 4G mobile broadband deployment and usage. China Mobile, Unicom and China Telecom recorded a combined 789.5 million 4G subscribers as of January 31.
China Mobile is the global telecommunications industry’s top 4G network operator with its 552.2 million 4G subscribers in the same period, surpassing the entire population of the United States at 324 million last year.
The MIIT’s current development programme for the telecommunications industry includes promoting the construction and sharing of infrastructure, as well as business collaboration. This has been manifested by China Tower Corp, the infrastructure-sharing joint venture formed by the three telecommunications network operators in 2014.
It also called for actively promoting mixed-ownership reform and encouraging private capital participation in the industry.
Unicom confirmed in October that its parent, China United Network Communications Group, was among the initial batch of participants in Beijing’s state-owned enterprise “mixed-ownership reform plan”, which would involve strategic funding from major domestic private-sector enterprises.
Speculation has been rife that China’s three major internet companies – Baidu, Alibaba Group and Tencent Holdings – would be encouraged by Beijing to invest in Unicom’s parent. New York-listed Alibaba owns the Post.
As such, the forecast for the next five years is for fibre-optic systems and 4G networks to expand more broadly into rural areas. Cities, meanwhile, can expect the commercial roll-out of 5G services, broad support for connected devices that are part of the internet-of-things networks run by businesses and government, and the emergence of “smart cities”, which integrate multiple advanced information and communications technologies to manage public sector services.
“The telecommunications network operators will help enable this future, but will not participate in most of the new developments, nor will they participate in most of the revenue upside,” Lane said. “They are utilities, and as such, will continue to grow at mid-single digits and generate stable returns.”