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China telcos' Q4 profits to trail Mobile; eyes on 3G

(Agencies)
Updated: 2009-03-17 19:05

China Mobile should post an 18 percent rise in quarterly profit, aided by competitive pricing, with investors watching for 3G network developments to gauge if the carrier can hold a comfortable lead over rivals.

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The world's largest mobile carrier by subscribers, and its two smaller rivals, are expected to feel the effects of a global downturn that has rippled through China as it prepares to roll out the long-awaited next generation 3G services this year.

Still, China Mobile's competitive pricing, strong cash flow and broad network coverage are expected to help offset the impact of the economic slowdown.

Analysts will be looking for signs of the impact of 3G on China Mobile, China Telecom and China Unicom, as each builds out networks after the government's awarding of licenses early this year.

"Fourth-quarter earnings must be weak, people already know that. What they want to see is the magnitude of the losses before they focus on 2009, which is likely to show a different landscape for the competition depending on how 3G turns out," said Marvin Lo, telecom analyst at Daiwa Institute of Research.

While China Mobile's profit could rise, China Telecom and Unicom could see their bottom lines weaken if not for exceptional items, as each faces swelling marketing costs for their new 3G services and tough competition.

Both Unicom and China Telecom are also starting to write off billions of dollars of investment in PHS, a low-cost alternative to cellular service that they offered before being given licenses for true mobile services. The government has said PHS services would now be retired by 2011.

Despite the write-offs, market focus will be on 3G in the weeks ahead as companies spell out their strategies for networks that are likely to fuel their growth over coming years.

While China Telecom and Unicom received licenses to build networks based on globally accepted standards, their subscriber numbers remain far behind China Mobile, which received a license to build a network based on an unproven home-grown technology known as TD-SCDMA.

"With regulatory risks seemingly subsiding ... we believe a major swing factor for earnings and the share price will be the impact of competition in a post-restructured 3G environment," Macquarie Research said in a recent note.

The three State-run telecom carriers will spend 400 billion yuan ($58.5 billion) over the next three years building out their 3G mobile networks.

Shares of China Mobile gained 1.2 percent in the 2008 fourth quarter, beating a 20 percent drop on the Hang Seng Index. Unicom fell in line with the broad index, and China Telecom lost 7.7 percent.