May 2, 2018 / 3:50 AM / in 5 months

Breakingviews - Chinese telco investors have rare reason to cheer

HONG KONG (Reuters Breakingviews) - Chinese telecom operators can ring home with good news. U.S. probes into equipment makers ZTE and Huawei might prompt Beijing to delay or scale back a rollout of next generation wireless technology, known as 5G. That would be a relief to the $200 billion China Mobile and peers that will foot the bill for the big buildout. It’s a rare reason for investors in these state giants to cheer.

A customer is shown a new iPhone X at an Apple Store in Beijing, China November 3, 2017. REUTERS/Damir Sagolj

U.S. sanctions enforcers have already cut ZTE off from its American suppliers. Huawei is under investigation too, Reuters reported last week. The pair could account for more than half of all telecom equipment sales in China, according to Mizuho, meaning any disruption would quickly ripple across the networks.

A longer wait before the next big investment splurge would be welcome news for the long-suffering shareholders of China’s three carriers. China Mobile, China Telecom and China Unicom all trade on trailing EBITDA multiples of between 2.8 to 3.8 times, according to Eikon. By comparison, international competitors such as Sprint and Vodafone are valued at 5 and 6.6 times, respectively.

The discount is for good reason: Beijing is known to order the state-owned carriers – and especially the biggest, China Mobile – to burn piles of money on new mobile technology to set global standards, often well before the upgrades makes financial sense based on network data usage. Nor are these companies efficiently run; China Mobile has a net cash position, for example.

The next big wave of investment is expected to start around 2020. Analysts at Morgan Stanley reckon China Mobile’s return on equity will probably decline from as much as 12 percent this year to 8 percent in 2023 and onward.

For now, the carriers are still trying to recoup the cost of the previous technology buildout. China Mobile’s capital expenditure as a share of telecoms service revenue is just 27 percent today – compared to 37 percent around the height of 4G investment in 2014 – and the operator’s earnings are growing at roughly 4 percent. So any delay will allow profits to accumulate. 

Chinese officials might be worrying about U.S. probes into equipment makers but investors wouldn’t mind if operators could hang up a little longer on 5G plans. 

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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