Rural telephony growth makes India, China top investor picks

Rural telephony growth makes India, China top investor picks
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First Published: Wed, May 16 2007. 11 08 PM IST

Strong outlook: Around 35 people in every 100 have a cellphone in China, compared with only 15 in India, the world’s fastest growing mobile market with more than 166 million mobile phone users.
Strong outlook: Around 35 people in every 100 have a cellphone in China, compared with only 15 in India, the world’s fastest growing mobile market with more than 166 million mobile phone users.
Updated: Wed, May 16 2007. 11 08 PM IST
Khettiya Jittapong/Reuters
Seoul: Phone companies in China and India remain favourite picks for investors in Asia, as operators in the world’s biggest and fastest growing mobile markets push out from the cities to rural areas in search of new customers.
Among Asian analysts’ top picks are Chinese wireless-market leader China Mobile and India’s top two, Bharti Airtel and Reliance Communications .
“China is still one of the fastest-growing markets, where there is much more room to grow and the competition is not very intense,” said DBS Vickers Securities telecoms analyst Chirasit Vuttigrai.
UBS’s Jinjin Wang, in a recent research note, called China Mobile “the best play on the China consumption story” and “the best rural growth proxy”. Wang rates China Mobile a “buy” with target price of HK$108 (around Rs540)—an upside of around 48%.
“Economic growth in China should lead to increasing affordability of mobile services, strong price elasticity and stable Arpu,” said Wang, referring to average revenue per user (Arpu), a key industry measure. “In our view, the share price should capture not only upside in disposable income levels, but also a structural change in household expenditure towards telecoms.”
Strong outlook: Around 35 people in every 100 have a cellphone in China, compared with only 15 in India, the world’s fastest growing mobile market with more than 166 million mobile phone users.
China Mobile, the world’s largest wireless carrier, is expected to report an 18.5% rise in 2007 net profit to 78 billion yuan (around Rs39,000 crore), according to 24 analysts polled by Reuters.
In the last 12 months, China Mobile shares jumped more than two-thirds to trade at HK$73.30 on Tuesday. The stock trades at 18 times 2007 earnings, versus a sector average of 28 times.
Around 35 people in every 100 have a cellphone in China, compared with only 15 in India, the world’s fastest growing mobile market with more than 166 million mobile phone users.
Analysts say it will be late 2008 or early 2009 before the Chinese and Indian markets are fully open to competition that could eat into revenues and margins.
Meanwhile, India’s top mobile firm Bharti and second-ranked Reliance are expected to post earnings growth of more than 40% for the financial year ended March 2008.
Despite the arrival of Vodafone Group, which will cut its 10% stake in Bharti to 4.4% as part of a deal to buy a controlling stake in fourth-ranked Hutchison Essar, companies such as Bharti and Reliance will continue to grow.
“There will be a fight for market share, but the overall growth is so huge that everybody will be able to grow quite handsomely,” said Sumit Modi, a telecom sector analyst with Mumbai-based brokerage Emkay Share & Stock Brokers Ltd.
The move to tap the vast rural population with increased capital expenditure and sharing of infrastructure with other rivals would benefit both firms, Modi said.
Saturated market
But operators in the more saturated markets are expected to suffer from weak profit margins amid cut-throat price competition, forcing some to look for growth in larger and less developed Asian markets such as Indonesia and India.
Among them are South Korea’s SK Telecom, Singapore Telecommunication, and Telekom Malaysia.
Some analysts like Telekom on expectations that its exposure to India, Indonesia and other emerging markets such as Sri Lanka and Bangladesh, will be growth drivers.
“Telekom Malaysia is a good buy as its foreign operations should help improve margins,” said JP Morgan analyst Andy Chan, who rated Telekom a “buy” with target price at 12 ringgit (Rs144).
But in Australia and New Zealand, where mobile penetration rates are around 100%, regulatory risks have also clouded growth potential.
Brokerage Macquarie has downgraded New Zealand’s Telecom Corp. due to a tough outlook. The government has ordered it to open up its domestic networks to competitors, even as growth at home slows and its Australian business struggles.
In Thailand, despite a government probe into the legality of all telecoms contracts, signs of easing competition in the mobile sector prompted some analysts to upgrade ratings for market leader Advanced Info Service to buy from sell.
Among them were Goldman Sachs and Phatra Securities, the Thai partner of Merrill Lynch. “It’s good turnaround,” said CIMB analyst Kelvin Goh. “The Thai mobile market is growing and its competitive environment is improving,” said Goh who rated AIS a “buy”.
Sumeet Chatterjee in Seoul and Vinicy Chan in Hong Kong contributed to this story
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First Published: Wed, May 16 2007. 11 08 PM IST
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