Upgrade on China Mobile, and Downgrade on China Unicom.
Both are Chinese, but one is better than the other.
China Mobile already has a comfortable lead over China Unicom. This is mostly in part of China Unicom’s dual focus on both GSM and CDMA operations, paralyzing their ability to focus and expand their network. Consequently China Mobile can breathe with ease growing their subscriber-base and ARPU much faster – even in country-side China. Right now, China Mobile has about 349 million users, next year they should reach 365 million, and 430 million in 2008. Likewise, I see their EPS growing 16% and 25% for the same coming two years. Their share prices have doubled over the past 12 months, outpacing the Hang Seng Index in Hong Kong, and even the S&P 500.
Meanwhile for China Unicom, their price already increased by 20% over the past 2-3 months. But their price appreciation is more likely to be speculation on their restructuring - China Unicom selling its CDMA network to China Telecom and merging with China Netcom. In my opinion, the appreciation is already well above it’s reasonable price. On the negative front, there hasn’t been much focus on the obvious that throwing away their CDMA network would give China Telecom an established 3G network and subscriber base – and as for China Unicom, they’d have to restart their 3G operations with China Netcom. When the government issues four new 3G licenses (probably during 2Q to 3Q in 2007), more competition will be another factor to starting over again.
Don’t forget that we’re still dealing with the Chinese government, political implications and repercussions are highly unpredictable. And having said that, China Mobile also has a stronger political relationship – favor them in gaining government deals and licenses.
The Chinese telecom market is doing well – according to China’s Ministry of Information and Industry, penetration in the cell-phone market improved from 30.3% in 2005 to 35.3% in 2006 – plenty of room before saturation in the market (like in Singapore or Hong Kong).
I see price swings for these two telecom players to be more reflective on recent market turbulence rather than specific news. But if I had to choose between the two, read my first line again before finishing this one.