Tags:China Mobile | 3G | CDMA | GSM

China Mobile Ltd, the world''s largest mobile carrier, and smaller rival China Unicom Ltd (NYSE:CHU) are expected to announce strong growth in 2007 net profit as the rising number of cellphone users continued to boost revenue.

But in 2008, their push into China''s high-growth rural areas could weigh on the mobile carriers'' margins as they offer more affordable service plans and perks to less affluent customers, said analysts.

Beijing''s plan to restructure the sector remains this year''s key focus. Some analysts speculate that details of the plan will be unveiled as early as this month following the creation of a new Ministry of Industry and Information
Structural changes in the sector will define prospects for both China Mobile and Unicom over the long-term. Analysts are expecting the plan will pave the way for the consolidation of the current six telecommunications players into three integrated ones.

China may also reveal soon its plan regarding the launch of its homegrown third-generation (3G) technology wireless standard known as the TD-SCDMA, said analysts.

China Mobile, which holds the lion''s share of the mainland''s wireless market, is expected to report on March 19 a 26-percent rise in 2007 net profit to 83.1 billion yuan from a year earlier, according to analysts polled by Thomson Financial.

The dominant wireless carrier, which posted a net profit of 66 billion yuan in 2006, signed up an average 5.7 million users last year after it increased its presence in the country''s rural areas.

Unicom is expected to post a more modest growth of 18 percent in 2007 earnings to 7.1 billion yuan from the previous year''s 6.1 billion, according to a Thomson poll.

Unicom will announce its results on March 27.

Merrill Lynch (NYSE:MER) (OOTC:MERIZ) expects Unicom''s revenue for 2007 to have grown by just 5 percent, although the carrier''s profit margin should come in strong at about 54 percent, up 150 basis points from a year earlier, as management cut costs by removing certain handset subsidies for its CDMA wireless network users.

Unicom also provides GSM wireless network service.

Unicom will be key to the government''s restructuring plan as Beijing addresses concerns regarding the increasingly expanding market for wireless phones and the falling profit margins of fixed-line phone operators China Telecom Corp (NYSE:CHA) and China Netcom Group Corp (Hong Kong).

The increasing popularity of mobile phones in China is dimming the prospects for the fixed-line operators as many of their subscribers are switching to cellphone use.

Most analysts are predicting that Unicom will sell its CDMA network to China Telecom, the bigger of two fixed-line companies, while merging the remaining wireless network business with China Netcom''s fixed-line business.

Unicom benefits most
Credit Suisse expects Unicom to benefit the most from the restructuring plan as the wireless phone company will likely sell its CDMA assets at a premium and ensure its future profitability as it swaps assets with China Netcom.

''Unicom will have better bargaining power and its minority shareholders should be protected under the Hong Kong listing rules,'' said Credit Suisse analyst Jeffrey Tam. Unicom shareholders will likely be asked to vote on deals relating to the sale of the company''s assets.

Credit Suisse has upgraded the stock to an ''outperform'' from a ''neutral'' and raised its price target to 24 Hong Kong dollars from 15.50 on the expectation that China will formally announce a restructuring plan this quarter.

The restructuring plan, however, could be bad news for China Mobile, whose dominance in the telecommunications market will likely be challenged by new mobile market participants.

Moreover, China Mobile, which is also widely expected by the market to promote China''s homegrown TD-SCDMA wireless standard, may have to give up some of its share in the wireless market to its rivals.

At the very least, the policy changes would ensure that China Mobile no longer gains market share, said Goldman Sachs (NYSE:GS) analyst Helen Zhu. The changes may even result in China Mobile losing some market share, albeit gradually, she said.

Over the long-term, China''s wireless sector will likely continue to grow.

The penetration rate for China''s wireless market is just over 41 percent, with the rural market representing roughly half of that, said Merrill Lynch analyst Cynthia Meng.

''Even in the urban wireless market with approximately 66 percent penetration rate, we believe that there is decent growth potential,'' she said.

By comparison, the average wireless penetration of Western European countries is over 100 percent.

China may also put off for next year the launch of its homegrown 3G network standard as the country focuses on laying down the regulatory framework for the restructuring of the sector, Meng said.

Shares of China Mobile have risen 59 percent over the last 12 months, underperforming Unicom''s 88-percent surge, reflecting investor anxiety over the impact of the restructuring on China Mobile''s future earnings growth.

China Mobile was last up 30 Hong Kong cents at 106.70 dollars and Unicom up 20 cents to 17.26 dollars.


Source:Thomson Financial