Telecom firms face fierce rivalry
By Xiao Chen (China Daily)
Updated: 2004-04-01 09:09

Gauging market trends is a most difficult task and one that analysts are trying to perfect.

One trend that stands out when studying the 2003 financial reports for China's three listed telephone companies, however, is that China's telecommunications market is becoming more and more ferocious as all of the players have pledged better results for the 2004 fiscal year.

In the past two weeks, China Telecom Ltd, China Mobile Ltd and China Unicom Ltd, the three barometer telecom stocks on the Hong Kong market, announced their annual results.

Both China Telecom and China Mobile outperformed analysts' expectations while China Unicom reported weaker-than-expected results.

"In my opinion, the performance of the three companies remained quite stable last year, though there were some fluctuations in the stock market," said Dai Chunrong, an analyst with China Securities.

She believes that telephone companies' wally performance last year can be attributed to a recovery of the global telecom market, company restructuring as well as aggressive marketing strategies.

"But, fiercer competition this year is foreseeable as each one is aiming to become stronger and bigger," she added.

China Unicom Ltd

For China Unicom Ltd, the country's second-largest mobile operator, it underperformed market expectations last week as its 2003 net profit fell 8.3 per cent, according to a company statement last Thursday, dragged down by write-downs and a loss on the sale of its paging business.

The company's 2003 profit fell to 4.22 billion yuan (US$510 million) from a restated 4.6 billion yuan (US$554 million) a year earlier.

The 2003 figure included a 663 million yuan (US$79.8 million) loss on its paging business and charges of 560 million yuan (US$67.4 million) due to a write-down of paging assets.

Diluted profit per share fell to 33.6 yuan (US$4) from 36.6 yuan (US$4.4).

It would have reported a profit of 5.08 billion yuan (US$612 million) excluding the impact of paging business items, up 10.5 per cent from the previous year, China Unicom Ltd said.

Analysts believe the sale of its paging business enables the company to get rid of a big loss-making burden and help it concentrate on expanding its mobile phone business.

In its financial report, China Unicom said annual revenue rose to 67.6 billion yuan (US$8.1 billion) from 40.6 billion yuan (US$4.8 billion), fuelled by rapid growth in its mobile business, which grew 88.1 per cent to 59.75 billion yuan (US$7.1 billion), helped by acquisitions of nine additional provincial operators in China.

Following the results, American Depositary Shares of Unicom stock declined 3 per cent to US$10.13 in New York trading.

China Unicom also said last Thursday that free cash flow after covering spending on new capital equipment turned positive, with a net inflow of 2.81 billion yuan (US$338 million) reversing a net outflow of cash of 5.89 billion yuan (US$709 million) in 2002, when the company spent heavily to upgrade networks.

"This marked that China Unicom Ltd is stepping into a new stage," said Wang Jianzhou, chairman and chief executive officer of the company.

"For China Unicom Ltd, we will continue our efforts to hammer out an improved strategy to sustain our revenue and profit," he said.

The company projected telecommunications customer demand to remain strong this year, although there will be more intense competition in the domestic market.

Figures from the company showed China Unicom's CDMA system had 21 million subscribers at the end of February, well behind the 75 million users of its GSM network and the 147 million subscribers for Unicom's chief rival, China Mobile.

To attract more subscribers, Wang said, the company will further boost the value-added service based on its CDMA 1X networks.

The company has so far wrapped up co-operations with more than 300 content providers.

"We will kick off more personalized services and solutions for different industries," Wang said.

In fact, China Unicom became the world's second-largest CDMA operator by the end of last year, after US-based Verizon Wireless which has a total of 36 million CDMA users.

Also, to differentiate its services in the country, China Unicom said it plans to begin offering its "World Wind" phone service, which will work on both GSM and CDMA mobile networks in China and also operate in other countries.

According to him, the dual-mode handset supporting both GSM and CDMA networks enables users to transfer from GSM and CDMA networks automatically.

China Unicom is the only one which runs both GSM (global system for mobile communications) and CDMA networks.

"The dual-mode handset will be a key strategy for us to ensure the development of our two networks and make the two more complementary," Wang boasted.

It is reported that China Unicom is to purchase more than 500,000 dual-mode handsets this year.

Analysts said the dual-mode solution is a powerful revenue generator this year as the Chinese Government is unlikely to release 3G licences until next year.

According to the company's blueprint, "World Wind" is scheduled to be officially kicked off first in 15 major cities such as Beijing, then Shanghai and Guangzhou in the middle of the year.

In another development, China Unicom projected that spending on new networks and other capital equipment would decline slightly to 19.35 billion yuan (US$2.33 billion) in 2004 compared with 19.76 billion yuan (US$2.38 billion) in 2003.

"We will come up with a variety of ways to raise funds for our development," said Wang, but he didn't elaborate on that.

China Unicom acquired nine provincial networks from its State-owned parent at the beginning of 2003, and another nine networks in January, giving it coverage across nearly all of China.

It sold Guoxin Paging to its parent company last year.

China Mobile Ltd

China Mobile Ltd, the country's largest telecom operator, posted on March 18 a net profit of 35.5 billion yuan (US$4.3 billion) for its 2003 fiscal year, up 9 per cent from the previous year.

Turnover rose to 158.6 billion yuan (US$19.1 billion) from 128.6 billion yuan (US$15.4 billion).

The company declared a final dividend of 20 HK cents, giving a total of 36 HK cents for the year.

The company also released at the same time figures on its average revenue per user (ARPU), a widely watched industry indicator, which fell to 102 yuan (US$12.2) per user per month last year.

According to China Mobile's statement, revenue from the new business reached 16.2 billion yuan (US$1.95 billion), up 85.5 per cent from the previous year - among which, its short messaging service (SMS) business surged 134 per cent to reach 9.9 billion yuan (US$1.19 billion).

"To cultivate more new businesses will become more and more important for the company to maintain its profitability and withstand market competition," said Dai with China Securities.

Competition comes mainly from its rival China Unicom, whose CDMA (code division multiple access) network began to gain strong momentum since the second half of last year, and since the wireless phone service known as "xiaolingtong" or personal access system (PAS) was kicked off by the country's two largest fixed-line phone operators - China Telecom and China Netcom.

"The trend for more value-added service is foreseeable as the growth rate for traditional voice business declines year-on-year," Dai said.

For China Mobile, Dai believes that to maintain its dominant market share, more focus on the new business as well as services tailored to medium- and low-end customers are the three major ways for China Mobile to sustain its development this year.

Dai's remarks was echoed by Wang Xiaochu, board chairman of China Mobile.

Wang expected that growth of its subscribers this year will be larger than last year as low mobile phone teledensity offers great potential for mobile phone companies.

Figures from the Ministry of Information Industry showed that by the end of January, the country has recruited a total of 277 million mobile phone subscribers. However, about 80 per cent of the nation's 1.3 billion people still do not own mobile phones, many of those, particularly in the country's rural areas, are not wealthy enough to buy handsets and enjoy mobile telecommunication services.

"We will intensify our marketing to lure more low-end subscribers," he said.

Also, the company is to raise its expenditure this year to US$5.8 billion to add more investment on network expansions.

The expenditure for last year stood at US$6 billion, compared to US$5.6 billion in 2002.

"As for 3G, we will carefully watch the development of the telecommunications market and 3G technologies to hammer out our 3G policies," he said.

Wang said the company is inclined to adopt WCDMA technology.

He believes that the co-existence of 2G and 3G will last for a long time within the company's network.

"But as regulators still having no timetable for 3G, we, in the short term, won't invest a lot on 3G related items," he said.

As for the purchase of a new provincial network from its parent, Wang also disclosed that it plans to fulfil the acquisition plan before the end of June.

"The plan is under discussion and no timetable is available now," he said.

In December, China Mobile said it was in talks with its State-owned parent to buy the last 10 provincial networks.

China Telecom Ltd

China Telecom Corp Ltd, the country's largest fixed-line phone operator, posted a better-than-expected 2003 net profit of 24.69 billion yuan (US$2.98 billion) on March 17, up 153 per cent from the previous year.

Revenue for 2003 stood at 118.5 billion yuan (US$14.2 billion), representing a growth of 8.1 per cent from the previous year, and the company declared a dividend of 0.0689 yuan per share.

"The low-end wireless service known as xiaolingtong or personal access system (PAS) and broadband services are the major driving forces for the company's growth last year," said Zhang Bing with CITIC Securities.

The two factors will continue to play a significant part in sustaining its growth this year, he said.

According to a statement from China Telecom, its fixed-line subscribers grew 22 per cent to 118 million.

It recorded 18.35 million subscribers for its xiaolingtong so far.

Meanwhile its broadband subscribers reached 5.63 million, registering a 200 per cent growth compared to the previous year.

"A fair, open and effective environment should be the key focus for the reform of telecommunications sector," said Zhou Deqiang, board chairman and chief executive officer of China Telecom during the CPPCC.

China Telecom is thirsty for a mobile licence from the country's telecom regulator to enable itself to offer a full range of telecommunication services.

He believes that the country's sustained domestic economic development helps carve out a huge market potential for growth.

To compete with China Mobile and China Unicom, China Telecom and its rival China Netcom have so far spent billions of dollars over the last two years to roll out their PAS and broadband networks.

In another development, China Telecom Corp also stated on March 17 that it plans to issue shares worth roughly HK$23.7 billion (US$3 billion) to fund the planned acquisition of 10 provincial phone networks from its State-owned parent.

The company said that of the 8.317 billion shares it hopes to issue, about 9 per cent are owned by its parent firm, which would effectively lower the government's stake in the company.

The company also said it will seek approval from shareholders to issue new stock, allowing it to issue the new shares at any time before November 2.

Late last year, China Telecom acquired six provincial networks from its parent for 46 billion yuan (US$5.56 billion), bringing its number of city and provincial networks to 10. The company eventually plans to buy another 11 networks still owned by its State-owned parent.

The purchase may include the fixed-line network business, as well as the data and Internet businesses of its parent.

In a statement last month, China Telecom Corp Ltd said discussions on purchasing remaining provincial networks were preliminary and neither the price nor financing of any purchase had been agreed upon.

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