Investors have been fleeing China's state-owned telecommunications giants since an industrywide restructuring was unveiled in May. Now it might be time to look again at one of them, China Telecom Ltd.

The long-awaited restructuring combined six Chinese carriers, with differing business and geographic segments, into three nationwide carriers that provide fixed-line and wireless service. China Telecom, which had been the biggest of two fixed-line carriers, acquired a wireless network as part of the deal, and some analysts say it is the best bet of the trio of telecom companies for investors looking to take advantage of the sectorwide drop in stock prices.

"For the longer term, people are positive" about China Telecom, says Michael Meng, a telecom analyst at Citigroup in Hong Kong.

In the short term, there are issues. Francis Cheung, head of telecommunications research for CLSA Asia-Pacific Markets in Hong Kong, says China Telecom's shares are "very cheap" based on current valuations and he believes the company eventually will be successful with wireless service. But for now, he says, "the road is bumpy, and financial performance will get worse before it gets better."

On June 3, the first day that China Telecom's shares traded after the government unveiled the restructuring May 24, the stock plunged 13% to 4.95 Hong Kong dollars (63 U.S. cents) in Hong Kong. On Tuesday, it rose three Hong Kong cents to HK$3.94, or 36% below its level at the end of last year. (Shares of cell-service giant China Mobile Ltd. are also down 36% this year in Hong Kong, while those of the country's other main operator, China Unicom Ltd., have fallen 31%.) China Telecom also has American depositary receipts listed on the New York Stock Exchange, which as of last Friday were down 36% this year.

Since China's restructuring announcement, investors have been focused on expectations that the government will issue new regulations to facilitate competitiveness between the newly restructured carriers. The rules are likely to benefit the smaller two carriers in their competition with China Mobile, which controls more than two-thirds of the wireless market. Known in the industry as "asymmetric regulations," the expected rules would likely include requirements that carriers share parts of their networks and allow customers to change carriers without changing phone numbers.

Any such changes would likely benefit China Telecom, as the wireless network it bought has fewer users than those of Unicom or China Mobile. "It's just a matter of how the regulation will help them" and how long it will take, says Citigroup's Mr. Meng, who has a 12-month target for China Telecom of HK$4.40, or 12% above Tuesday's close. CLSA's Mr. Cheung has a target of HK$4.20.

All three Chinese carriers face uncertainty over the expected rollout of high-speed, third-generation technology, which will facilitate fancier, more costly services for customers, such as wireless video. But here, too, China Telecom is well positioned, some analysts say. Its wireless network, which it purchased from Unicom for $16 billion, uses CDMA technology that's easier to upgrade to 3G than the GSM standard that Unicom and China Mobile use, says Duncan Clark, chairman of BDA China Ltd., a Beijing-based technology consulting firm.

China Telecom executives have said the company would invest about 80 billion yuan, or about $10 billion, over three years on its CDMA network, while Unicom has said it plans to spend 100 billion yuan over the next two years for its 3G network.

Given the uncertainties, analysts say investors should be cautious about all Chinese carriers, including China Telecom. With all the spending in the companies' near future, investors who enter now would want to be in for the long haul when they can make their 3G services profitable. China Telecom hopes 3G will make a profit for it in one to two years.

Still, China Telecom has other strengths that could make it a more stable choice than its rivals, some analysts say. While the company's core fixed-line service is losing subscribers to wireless services, revenue from its expanding nonvoice fixed-line services -- including broadband Internet -- are rising. Broadband revenue alone for China Telecom rose 31% in the first half from a year earlier. Internet and data services accounted for 27% of the company's of 90.4 billion yuan operating revenue in the half.

In the view of some analysts, China Telecom has relatively strong management and that increases the chances it can achieve its goal to more than double the number of cellphone subscribers to 100 million by 2010 from 43 million now.

Before the restructuring, some analysts thought China Unicom would be the big winner. Now, they feel it will have to struggle through a complicated integration with China Netcom, the fixed-line carrier with which Unicom is merging. "I think investors gradually have recognized more risks for China Unicom coming from the merger with China Netcom which will be very complex and lengthy," says Liu Ning, an industry analyst at BDA.

Wendy Liu, an analyst for ABN Amro in Hong Kong, wrote in an Aug. 28 report that China Telecom's "execution capability, strong brand, favorable spectrum allocation, and distribution capability are [the] basis for our long-term investment case." She rated the stock a "buy," with a 12-month target of HK$5.

source:THE WALL STREET JOURMAL