ANALYSIS-China Telecom conquers HK, marches upward
By David Lawder HONG KONG, Feb 10 (Reuters) - China Telecom (Hong Kong) Ltd, after dethroning HSBC Holdings as the Hong Kong stock market's highest valued company, should easily withstand a near-term bout of profit-taking and march higher, analysts said on Thursday.
The stock has ridden a wave of global enthusiasm for cellular providers after Vodafone AirTouch Plc's 180 billion-euro takeover of Mannesmann AG has set a new valuation benchmark for such companies.
Anticipation that Morgan Stanley Capital International will add China Telecom <0941.HK> to its China Free Index is providing a steady stream of institutional demand for the stock. Add the vast potential for subscriber growth in the young Chinese cellular market and the seemingly boundless potential of mobile Internet and data traffic and the stock seems like a sure bet. But with a torrid three month rise of nearly 113 percent -- including nearly 19 percent this week alone -- is it overdone? Most analysts say no. "I think it's got legs. I think this year, what people are becoming aware of is the potential for value added services from wireless data," said Nomura Securities analyst Richard Ferguson.
BRIEF CORRECTION SEEN China Telecom shares shrugged off early selling pressure on Thursday to end down just HK$0.25 or 0.39 percent at HK$63.75 as the stock cooled from its record high of HK$67 on Wednesday.
Some analysts said it could be poised for a brief correction as it consolidates gains. "The stock has risen very rapidly in a very short period of time, so a correction is entirely rational and conceivable," said Tim Storey, Goldman Sachs' telecom analyst in Hong Kong. "We're comfortable owning the stock where it is and we realise there may be a valley to cross between the peaks. We'd be very aggressive buyers of the company on the dips," he said. Storey said he has a 12-month price target of HK$80 on the company and a buy recommendation on the stock. NEW INDEX KING Less than three years after its listing in October 1997, China Telecom has ousted HSBC <0005.HK> as the Hong Kong market's market capitalisation king. At Thursday's close, its market value topped HK$877.18 billion (US$112.75 billion), versus HK$761.23 billion for HSBC. In the eyes of traders, China Telecom is now a must-trade for arbitrageurs who want to move the Hang Seng Index <.HSI>.
"It's got a relatively small float, less than 25 percent, and some of that stock is quite tightly held, so it's quite easy for speculators to work the stock," said Howard Gorges, director at South China Securities.
"You can move it HK$2 or HK$3 quite quickly." It is far more expensive to push up HSBC shares, he said. Some fund managers are growing uncomfortable with China Telecom's pivotal role in holding up the Hang Seng Index. "You really only have three stocks in the market that are pushing up the index -- China Telecom, Hutchison <0013.HK> and Cheung Kong <0001.HK>.
It's not the whole picture going up," said Kitty Chan, Fund Manager with APC Investment Management.
She added that she is expecting China Telecom to stage a near term consolidation.
VAST SUBSCRIBER GROWTH But as cellular mergers fuel valuations and demand for mobile Internet plays continues to grow, analysts said they expect the company's shares to march higher.
With mobile telephone users in China numbering just five in every 100 of China's 1.2 billion people, the subscriber growth potential is staggering.
China Telecom had about 14.5 million subscribers at the end of October and operates near monopolies in six of China's richest provinces, including Guangdong and Zhejiang.
It is forecast to post 1999 earnings of 8.69 billion yuan (US$1.05 billion) for calendar 1999, up 35 percent from 1998, according to Barra Global Estimates.
HSBC Securities telecoms analyst David Gibbons said the restructuring of China's telecommunications industry and entry into the World Trade Organisation increased the potential for further asset injections into China Telecom.
The company acquired three major mainland cellular networks in 1999 at valuations that analysts viewed as favourable.
VALUE ABOVE ASIAN PEERS China Telecom's share price translates to a valuation of about US$4,180 per subscriber -- above the Asian average of US$3,000 but below deal-fuelled European valuations, Ferguson said. Hong Kong's SmarTone Telecommunications Holdings <0315.HK>, at HK$34.80 a share, is trading at about US$2,500 per subscriber, while the Mannesmann deal was valued at about US$6,200, he said. Japan's NTT Docomo <9437.T>, was trading at about US$9,000 per subscriber, a premium earned because it is leading the industry in mobile Internet usage. "China Tel is going to outperform the market whatever it does, but we're loath to put on a target price," Ferguson said. Analysts cautioned, however, that the current shine on the stock could be dimmed somewhat when China Unicom, the mainland's number two telecommunications player, launches its initial public offering later this year. Unicom, expected to raise at least US$1 billion, has the potential to become a Hang Seng Index constituent on its own and could offer even faster growth than China Telecom, they said. (US$1 = HK$7.78, 8.28 yuan) ((Hong Kong Newsroom +852 2843-6345, Fax +852 2845-0636 firstname.lastname@example.org)) .
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