Emerging Asia may lead telecoms growth in 2002

By : |December 18, 2001 0

Tony Munroe

HONG KONG: As mature-market telcos in Asia look to data and cost cuts to
offset moribund revenues, the most attractive growth prospects for sector
investors in 2002 may lurk in the region’s developing wireless markets.

Where a year ago China seemed a compelling play for investors looking to cash
in on the craze for basic cellular voice service, more exciting growth potential
might be found during the year ahead in Indonesia, the Philippines, and vastly
underpenetrated India, industry watchers said.

Still, expectations for the sector are mostly guarded.

"We still like things like Korea Telecom. We still think things like
China Mobile (Hong Kong) will be pretty mediocre performers, mainly based on
valuation," said Geoffrey Wong, head of Asia-Pacific investments at UBS
Asset Management, which has a neutral telecoms weighting in its US$2.5 billion
regional portfolio.

Korea Telecom trades at a price/earnings ratio of 15.76 times, while China
Mobile trades at 24.14 times.

Developing darlings
"Longer term, you’re going to see more allocation in the developing
wireless stocks because that’s where the growth is," said ABN Amro analyst
Joe Locke. "But almost everywhere you look there are some pretty big
potholes in the road."

India, with just over five million mobile customers in a nation of more than
one billion, is set to see its telecoms market grow at 24 percent annually over
the next three years by one forecast, although there are comparatively few
listed firms.

Bharti Tele-Ventures, backed by Singapore Telecommunications, is expected to
launch an initial public offering worth up to US$385 million in early 2002,
which would make it the country’s biggest-ever IPO.

Other policy shifts of the past two years in India may stimulate competition
in both the mobile and fixed arenas. Indonesia, with a telephone penetration
rate of 3.7 percent in a country of 210 million, also presents opportunity and

Surging cellular business helped state giant PT Telekomunikasi Indonesia (Telkom)
post sharply higher nine-month profits in November. The cash-strapped Indonesian
government also had reason to be encouraged earlier this month when overseas
investors snapped up much of the 11.9 percent Telkom stake it sold in an
exercise that raised US$300 million.

"Indosat and Telkom Indonesia are still fairly cheap," although
both carry sovereign risk, said UBS’s Wong.

Sugar plums to lumps of coal
Sentiment has turned against both China Mobile and China Unicom Ltd. despite
their duopoly status in a cellular market that is adding more than five million
users every month.

The problem, watchers say, is that per-user revenues in China have fallen
faster than anticipated, and China is widely expected to issue one or two more
mobile licenses in 2002. Also, China Unicom’s CDMA network, to launch in January
alongside its GSM service, is widely seen as an ill-advised gamble.

China’s carriers, especially China Mobile, also enjoy fat margins that can
only narrow, watchers worry. "For early 2002, I expect the Korean telco
stocks to continue to perform better than their Chinese counterparts," said
Morgan Stanley analyst Mark Shuper.

"Korean profitability is generally stabilizing. China, in contrast, is
more likely to see margin pressure as Unicom launches its CDMA service. Any
weakness in industry profitability (in China) may come sooner than most people
think," he said.

Korean carriers, whose recent run of investor favour has eased, hope to
sustain the momentum of their world-leading broadband rollout. In wireless,
early success of 2.5G services based on the CDMA standard could mean continued
outperformance by SK Telecom and KTF Co, analysts said.

Scrounging for growth
Players in developed markets led by Japan and including Australia, Hong Kong and
Singapore will continue to seek new opportunities to offset stagnant domestic

"On the fixed-line side, it’s going to continue to be quite hard work.
The corporate data market is clearly quite slow," said Merrill Lynch
analyst Alistair Scott.

Japan’s contracting economy and sluggish fixed-line market — as well as
mobile giant NTT DoCoMo’s mostly fruitless forays abroad — have dampened
enthusiasm for its telecoms sector.

Despite falling by over 40 per cent on average in 2001, Japan’s telecoms
shares could see a second half recovery after first half cost cuts, predicted
UBS Warburg analyst Kate Lye: "All of them have to rebound after being sold
off short term. I think a sustainable performance will come through."

NTT DoCoMo will spend 2002 expanding its 3G mobile service — the world’s
first — to cities beyond Tokyo, hoping that even moderate success can offset
the disappointment that followed soaring global 3G expectations.

Number-two KDDI Corp will upgrade its wireless network to speeds rivaling
DoCoMo’s 3G service. Number-three Japan Telecom Co and its J-Phone mobile unit,
both of which recently came under the control of Vodafone Group Plc, will launch
3G in June after a six-month delay.

Fixed-line operations at all of Japan’s three major carriers are struggling
to regain profitability. Nippon Telegraph and Telephone Corp (NTT), Japan’s top
carrier and former state monopoly, is trying to restructure its bloated

Other developed market carriers, such as Australia’s Telstra Corp and SingTel,
must figure out what to do with the extra cash they spin. In Hong Kong, Pacific
Century CyberWorks, which recently fired 506 employees, is expected to cut costs
further as competition in its former monopoly home market takes a toll.

Taiwan, meanwhile, plans an auction of five 3G licences among seven players,
which could also trigger consolidation.

(With additional reporting by Reed Stevenson in Tokyo and contributions from
Asia bureaus)

(C) Reuters Limited.

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