Thorny problem confronts Railcom
By Li Weitao (China Business Weekly)
Updated: 2004-08-26 15:55

China Tietong Group Co Ltd (CTT), a minor fixed-line telecoms carrier in the country, faces a major task in searching for a competitive core businesses to survive the nation's red-hot telecoms market, analysts said.

Tietong, or the former China Railcom Group Co Ltd (CRC), was separated from the Ministry of Railways earlier this year.

It's now under the State-owned Assets Supervision and Administration Commission (SASAC).

Tietong reshuffled its management team before it was relaunched last Friday.

The firm aims to collect 10 billion yuan (US$1.20 billion) in sales this year, compared with 7.14 billion yuan (US$860.20 million) last year.

It aims to earn 100 million yuan (US$12.05 million) in profits this year. That would mark the first time the firm has been profitable.

Industry observers said a tough road lies ahead for Tietong.

The lack of a core business and the lack of profitability is dogging Tietong, said Wang Yuquan, president of research house Forst&Sullivan (China).

That will affect the firm's prospects for some time, he said.

Developing mobile services and broadband services should be atop Tietong's agenda, suggested Guo Chang, an analyst with Beijing-based CCW Research.

However, Tietong, like its fixed-line peers China Telecom and China Netcom, is prohibited from offering mobile services.

Guo said Tietong should step up lobbying efforts to get a licence so it can offer mobile services. That, Guo added, would boost the company's business.

Industry experts expect the Chinese Government will hand out the licences to operators to deploy the 3G (third-generation) wireless networks next year.

However, the licences are very likely to be awarded to China Mobile, China Unicom, China Telecom and China Netcom.

Some observers have suggested up to three licences should be allocated, as too many licences might hurt the development of China's telecoms market.

Yet, Guo said there is the possibility Tietong will either receive a licence or share a licence with another operator.

Tietong plans to increase the number of its telephone subscribers to 10 million this year, compared with 6.89 million last year.

The firm also plans to have 700,000 broadband users by year's end.

Analysts said Tietong should ramp up efforts to develop broadband services, as the broadband business is beginning to take off in China.

"Besides, Tietong needs to aggressively streamline its workforce," Guo said.

The Ministry of Railways has exempted Tietong from 2.388 billion yuan (US$287.71 million) in debt, under a scheme engineered by the State Council aimed at propping up Tietong's business.

But that is not enough, as Tietong has sprawling businesses across China, Guo said.

By the end of last year, Tietong had 42.4 billion yuan (US$5.11 billion) in assets. The firm employed about 70,000.

Tietong is reportedly trying to list in a domestic stock market. A date has not been set.

Insiders have said the firm aims to raise 3 billion yuan (US$361 million) in the IPO (initial public offering).

Analysts said the IPO, which is already quite small, will be unattractive if Tietong cannot secure a mobile licence.

Wang Guoping, an analyst with China Galaxy Securities, said the listing will not occur in the immediate future.

"If Tietong wants to list, it must form a shareholding company ... and list all of its assets, unlike China Mobile, China Unicom and China Telecom," he said.

China Mobile, Unicom and China Telecom listed only some of their provincial assets when they launched their IPOs.

The firms' listed arms then gradually bought their parents' remaining assets.

Tietong, which is still not competitive, is unlikely to raise a substantial amount of money from the capital market, Wang said.

Yet, there are still opportunities for Tietong to turn itself around.

"If Tietong has some resources, whether from the telecoms networks or the government, foreign investors may be interested when the basic telecoms market is opened," Guo said.

Tietong has a national fixed-line network, even though it held approximately 2.3-per-cent of China's fixed-line telephone market last year.

In comparison, China Telecom and Netcom actually have a "half" network, since the former China Telecom was split into two firms based on geographic lines.

If Tietong can raise enough money to upgrade its ageing networks, it should be attractive, analysts said.

Insiders said the government had hoped China Mobile would acquire Tietong, but the cellular giant showed no interest in the firm's ageing networks.

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