Jefferies said 3G wireless data will drive significant change in China Telecom landscape over the next two years.
"While change has been moderate so far since the telecom restructuring, Jefferies China TMT analyst Cynthia Meng expects more significant market share shifts in the coming two years and reiterates China Unicom as her industry top pick. We view the growth in 3G data and increasing handset subsidization as positive for Apple Inc. and Motorola Mobility," said Peter Misek, an analyst at Jefferies.
In the two years following the industry wide telecom restructuring in China, total industry telecom services revenue share barely changed, despite a about 500 basis points shift from China Mobile in wireless subs market share in favor of China Telecom's (CHA) CDMA.
Industry profitability further skewed toward China Mobile from second half of 2009 to first half of 2011, as China Unicom and China Telecom have been aggressively promoting 3G through handset subsidies while the majority of their existing subs are still mid-to-low-end 2G users.
For China Unicom, increased 3G-related depreciation expense was one of the factors eroding its bottom line since second half of 2009.
As more mass market subscribers adopt low-cost smart phones (sub-1,000 Chinese yuan or $150), and start to enjoy 3G wireless data, Misek expects to see accelerated 3G wireless migration and data adoption in China.
Further, Misek holds the view that a much more significant industry market share shift among the three carriers in both quantity (subscriber share) and value (revenue and profitability) will take place in the next two years. His top pick within the Chinese telcos remains China Unicom (CHU).
The three telecom companies will kick off earnings season starting with China Mobile in mid-August. Misek's estimates are above consensus on China Unicom in both revenue and profits, and basically in line with the Street on China Mobile and China Telecom.
Misek expects China Mobile's total telecom service revenue to grow 8.6 percent year-over-year and profit to increase 3.4 percent year-over-year.
Misek projects China Telecom's total adjusted telecom services revenue to grow 7.1 percent year-over-year and adjusted net profit to increase 12.7 percent year-over-year. He expects China Unicom's total telecom service revenues to grow 11.7 percent year-over-year and profit to decline 61.6 percent year-over-year.
The China's Ministry of Industry and Information Technology reported capital expenditure came in at 47.5 percent of Misek's full year capital expenditure estimates. He expects second half spending to accelerate versus first half of 2011.
"Upcoming catalysts are positive. We hold the view that upcoming mass market smartphone availability will help accelerate Unicom's mid-tier 3G migration. In addition, the iPhone 4S introduction in fourth quarter helps solidify its handset portfolio leadership among high-end users; both of which are positive catalysts for China Unicom," said Misek.
Misek said China Unicom's valuation at the current level is attractive at 4.8 times of forward fiscal 2012 equity value/EBITDA, a 17 percent discount to the regional peer group average.
Misek said China Telecom's valuation has moved up in recent weeks on CDMA iPhone related news flow; however, its 6.3 times of forward fiscal 2012 equity value/EBITDA is a 9 percent premium to regional peers.
"We see more upside from Unicom. We do not see the likelihood of accelerated LTE licensing at the three telecom companies and maintain our Hold rating on China Mobile (CHL) despite its low valuation compared to regional and global peers," said Misek.