Government Clampdown on China Mobile Proves Illusory

The Chinese government plan that sapped $39 billion in market value from China Mobile Ltd. may only end up strengthening the wireless carrier's grip on the world's biggest telecommunications market.

On May 24, regulators ordered three smaller, state-owned providers to merge into two competitors that might be strong enough to chip away at China Mobile's 69 percent share of the country's wireless market. The remaining companies, China Telecom Corp., the largest fixed-line phone carrier, and China Unicom Ltd. -- second in wireless -- each will offer land-based and mobile service in a three-way battle with China Mobile.

While that may have been the stated intent of the government plan, Wang Lei, a fund manager at Thornburg Investment Management, says China Mobile may walk away with an even bigger chunk of wireless. The Beijing-based company may boost its share to 73 percent next year, as its competitors try to absorb assets that produce $16 billion in annual sales and employ more than 150,000 employees, estimates investment bank CLSA Ltd. The new companies lack the networks to quickly take on the fifth-largest company in the world, Wang said.

``I am confident China Mobile will continue its dominance,'' said Wang, who helps manage $52 billion including China Mobile shares in Santa Fe, New Mexico. ``Challenges faced by the other two carriers, such as business integration and personnel reshuffling, will keep them secondary players.''

Web Challenge

China Mobile also won the right to enter the faster-growing broadband Internet market, allowing it to challenge China Telecom, the nation's largest provider of Web access, and capture as many as one-third of the nation's high-speed Internet users.

Twenty seven of 33 analysts tracked by Bloomberg recommend buying China Mobile, even as the stock has fallen 17 percent since May 22. On average, analysts estimate the stock will reach HK$147.28 ($18.87) in 12 months, 36 percent above yesterday's close of HK$108.60 in Hong Kong.

China Mobile's shares fell 1.5 percent today to HK$107 at the end of trading in Hong Kong. China Telecom declined 4.3 percent to HK$4.48 and Unicom dropped 4.1 percent to HK$14.86. China Netcom Group Corp., the nation's second-biggest fixed-line carrier, fell 4.1 percent to HK$22.05 as Hong Kong's benchmark Hang Seng Index declined 2.3 percent.

China, home to more mobile users than the total populations of the U.S., U.K, and Japan combined, may have as many as 1 billion by 2012, CLSA estimates. Internet service is less developed and growing faster -- 27 percent in April from a year earlier versus 20 percent for wireless.

Market Coup

The latest market revamp began after China Mobile, controlled by China Mobile Communications Corp., cut prices and enticed customers to drop their land lines, causing China Telecom and China Netcom to lose more than 14 million subscribers from July through April. China Mobile added 67 million wireless users in those 10 months, almost four times the 16.9 million signed up by China Unicom.

Regulators ordered Beijing-based China Telecom and its state-owned parent to buy the smaller of China Unicom's two mobile units and a satellite phone provider. China Unicom would at the same time acquire Beijing-based China Netcom.

The surviving companies will face ``challenges with integration'' lasting as long as two years, said Kelvin Ho, an analyst at Nomura International Ltd. in Hong Kong, who recommends buying China Mobile and holding Telecom, Unicom and Netcom. ``Getting the assets doesn't automatically make them more competitive.''

Fortify Wireless

China Mobile can also use the reorganization time to fortify its wireless position and build a network to offer high-speed Web access. The government plan calls for the company to buy China TieTong Telecommunications Corp., the nation's third and smallest fixed-line carrier, bringing with it a license to sell Web services -- a market now dominated by China Telecom and China Netcom.

China Mobile has resources the other companies lack. It had $11.4 billion in cash at the end of 2007, more than double the combined holdings of its competitors, and generated $24.5 billion of cash flow from operations, to their $20.4 billion.

The only way to create a rival to challenge China Mobile is by merging Telecom, Unicom, and Netcom into a ``Super Telecom,'' said Francis Cheung, an analyst with CLSA in Hong Kong, who recommends buying China Mobile and Unicom, and selling Telecom and Netcom. The restructuring is ``a flawed plan.''

One concern for China Mobile has been limits the government may place on its future growth. China's telecom ministry said on May 24 it plans to adopt regulations without giving details or timing. Wang Lijian, Beijing-based spokesman for the Ministry of Industry and Information, declined to comment.

Government Limits

The limits may put a ceiling on China Mobile's market share, according to Ho. A ``harsher'' policy that limits China Mobile's profits or redistributes its earnings to rivals is unlikely, he said.

While China Telecom, Unicom and Netcom all rose when the restructuring plan was reported, they have each fallen 15 percent or more since shares resumed trading on June 3. China Mobile, after an initial drop, has fallen 7.7 percent.

The declines make China Mobile ``more attractive,'' said Nicholas Yeo, a Hong Kong-based fund manager at Aberdeen Asset Management, which oversees $48 billion. ``China Mobile is likely to remain ahead of competition given the strong brand name and operation that it has established,'' he said.

China Mobile spokeswoman Rainie Lei, China Telecom spokesman Jacky Yung, and China Unicom spokeswoman Sophia Tso, all based in Hong Kong, declined to comment on the restructuring. China Netcom spokeswoman Qin Shaojuan, based in Beijing, declined to comment.