China Telecom - Just Let it Ring
29 October 2002
So China Telecom is being floated - again. What do we mean, again? Well, the first spin-off from the former state telecommunications monopoly was called "China Telecom (Hong Kong) Limited" when it was floated on 23-Oct-97, in the waning days of a red-chip bubble. Despite its name, it did not have any licenses in Hong Kong - it was a bundle of two provincial mobile licenses (Guangdong and Zhejiang), a morsel to whet the appetite of investors, who for some reason were gullible enough to believe that the Chinese government would henceforth structure its telecoms industry to provide monopolistic tariffs for the benefit of international investors, rather than competitively priced phones for the people's republic.
In the prospectus of 13-Oct-97, the company now known as China Mobile (Hong Kong) Ltd (CMHK, 0941) which still has no licence in HK, proudly claimed:
"[CMHK] is the primary commercial vehicle for the MPT System to access the international capital markets".
The MPT System meant the Ministry of Posts and Telecommunications of the PRC (MPT), the Directorate General of Telecommunications (a State-owned enterprise under the control of the MPT) and the provincial and municipal level posts and telecommunications administrations under the ultimate control of the MPT.
That was then, and this is now. Five years on, CMHK has nearly completed the gradual, phased acquisition of mobile licenses from its parent, and has a strong mobile competitor, China Unicom Ltd (CUHK, 0762, floated on 22-Jun-00) which is following the same model of phased acquisitions. It is 77.47% owned by China Unicom (BVI) Ltd (CUBVI), which is 51% owned by China United Telecommunications Corp Ltd (CUSH), which has recently issued A-shares on the Shanghai Stock Exchange, trying to exploit what remains of the mainland equity bubble relative to the price of the underlying HK-listed shares. In effect, CUSH is nothing more than a holding vehicle for CUHK.
CUSH itself is 99.98% owned by China United Telecommunications Corp (CUCN, which brands itself as China Unicom). CUCN owns the other 49% of CUBVI. You will notice that CUCN and CUSH have very similar names, and this is perhaps an intentional fudge - the media inevitably and frequently mixes them all up when writing about what "China Unicom" is doing, and it makes it that much harder for investors to know whether they are talking about the Shanghai-listed company, the top parent company or the HK subsidiary.
Meanwhile, in fixed lines, what was a national network known as China Telecommunications Corp (China Telecom) was split up, with 10 northern provinces merging with China Netcom Corp and Jitong Communications Co Ltd to form China Netcom Communications Group Corp (China Netcom).
That left China Telecom with 21 provinces. So you are being offered shares in China Telecom? Well no, not quite, because again, China Telecom has created a new PRC subsidiary called China Telecom Corp Ltd (CTHK, 0728), which has been given just 4 licenses in the city of Shanghai and the provinces of Guangdong, Jiangsu and Zhejiang. And that is what you are being offered.
All of the fixed line restructuring took place during the summer and the details of how the different networks will interact with each other are still being worked out, but China never lets things like that stop an IPO.
Meanwhile on the mobile front, the ministers have blown hot and cold over whether and when they would grant mobile licenses to the fixed line providers, increasing the competition for China Mobile and China Unicom. On the one hand, it makes the China Telecom story "sexier" with a potential new source of revenue, and on the other hand, it dents the value of the existing listed providers.
Fast and loose
Despite the difficult equity markets, China has its heart set on getting the CTHK IPO away before the year end and has pulled out all the stops to do it, as have its bankers. The sponsors are China International Capital Corp (a JV between Morgan Stanley and government-owned China Construction Bank), Merrill Lynch and Morgan Stanley itself. You can read the prospectus here.
Surely these experienced sponsors know that they have to "train" their clients on what they can and cannot say during roadshows to promote a share offer, but it seems that CTHK's people could not help themselves but to start issuing unauthorised profit forecasts and announcing plans for asset injections, right in the middle of the press conference to launch the IPO. The Chairman and Chief Executive, Mr Zhou Deqiang reportedly said in a video conference from New York:
"We'll consider acquiring about five provincial networks from our parent six months after listing"
Not to miss out, the Chief Financial Officer, Ms Wu Andi reportedly said the firm expected to achieve 8% annual revenue growth over the next three years, and an 8%-11% rise in net profit.
We believe the Sponsors should be held to account for failing to control their client's outbursts of such information, which was not in the prospectus. It is the most basic no-no that you do not give out more financial information than you have put in a prospectus, which is meant to tell the whole story, nothing more and nothing less, and you are not allowed to embellish it with verbal commentary.
As a result of this charade, CTHK has been obliged to issue a supplemental prospectus to try and put the genie back in the bottle, now claiming that there are no profit forecasts, just "internal benchmarks" and "targets" and that "we have no current plans or anticipated timing in respect of any such acquisition and we have no plans as to the number or identity of the provinces that this may involve".
HK connection fees
How many places in the world are long distance calling rates on the rise? Probably just one, for now. Not only have company officials been playing fast and loose with the extra-prospectus material, but China Telecom yesterday announced that the Ministry of Information Industry (the successor to the MPT) has approved a 750% increase in delivery fees for calls from HK from US$0.02 to US$0.17 per minute, effective from this Friday. That means that calls which make the short hop from Hong Kong to Guangdong are going to cost about 4 times the typical cost of a call from HK to New York, at least for now.
That comes just two days before CTHK closes its IPO and smacks of desperation, not to mention the need for a 2nd supplemental prospectus to explain what this major tariff change means to CTHK. Like we said before, China will not run its industry to stifle economic growth for the benefit of foreign investors, and we do not expect the increase will stick. So if you are an institutional fund manager and your broker is on the phone telling you what exciting news it is that the tariffs have been raised, and that you had better get your cheque book out for those shares, just hang up the phone.
If you pass on this one, don't worry, there will be CTHK issues 2, 3 and 4, as well as China Netcom 1, 2, 3 and 4. Like bad movies, the sequels just keep on coming.
© Webb-site.com, 2002
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