Dialling back

5G uptake has surged in China

Few companies are more symbolic for long-term China-watchers than the original China Telecom (now China Mobile). In 1997, it set the template for China’s nascent privatisation process when it executed a $4.2 billion dual listing in Hong Kong and New York. It not only became the first Chinese company to raise more than $1 billion, but at the time its flotation also ranked as the largest-ever IPO from Asia ex-Japan. It signalled that China had arrived on the world stage and international investors welcomed it with open arms.

Seven years later, those same investors received their first indication that China wasn’t going to be following the Western corporate governance rule book any time soon. In 2004, the illusion that listed Chinese SOEs were being run by independent boards of directors was shattered when the government suddenly announced that it was simultaneously swapping the heads of the three telcos.

Even the chief executives themselves didn’t know it was happening until they got a call from the Communist Party’s personnel arm – the Central Organisation Department. Until that point, many Western investors hadn’t even heard of the secretive agency that governs the careers of Party functionaries.

Nearly 20 years later, the three telcos are once again a lightning rod for China’s relationship with the outside world. On May 10, they lost their appeal to prevent their delisting in New York, following an executive order by former US leader Donald Trump to bar them from US bourses on the grounds they were linked to the Chinese military.

The companies will formally depart US equity markets by the end of the month, although the reality is that they have already all but disappeared. The three were suspended from trading in January and removed by global index providers shortly after. Since then, American Depositary Receipt (ADR) holders have been able to swap their scrip for Hong Kong-listed shares, although there’s a small rump that remains unswapped (less than 1% of all three’s outstanding share capital). The Securities and Exchange Commission’s new chair, Gary Gensler, recently said he’s looking into how to deal with ADRs held by US brokerages that don’t have an international arm to execute a swap.

In response the Chinese telcos are returning to mainland China’s bourses. China Unicom already has a vehicle listed in Shanghai. China Telecom is now following suit and the local press says that China Mobile isn’t far behind.

China Telecom released its prospectus for a roughly $4 billion Shanghai IPO at the end of April. It’s planning to issue 13% of its share capital to fund its 5G expansion and industrial digitalisation plans.

One thing that pretty much the entire analyst community agrees on is how opportune the timing is, particularly from an investor’s perspective. After a few years of very heavy capex investment, the three telcos are starting to monetise 5G in terms of user numbers and average revenue per user (ARPU).

During the first quarter of 2021, China Mobile reported its first positive mobile ARPU growth in three years. It has already achieved a 9.9% penetration rate for 5G network subscribers, equivalent to 92.76 million users, with an ambitious target of 200 million by year-end.

China Telecom, meanwhile, reported its strongest quarter in more than four years. Service revenues jumped 8.6% year-on-year to Rmb100 billion ($15.6 billion).

So far, this hasn’t translated into higher valuations. All three telcos’ share prices came under pressure during 2020 because of 5G capex outlays and rising Sino-US tensions.

There’s been a bounce since the beginning of the year. This will have been particularly galling for Blackrock, which offloaded a roughly 6% stake in China Telecom at HK1.92 in January (the stock’s lowest point since it listed in 2002). China Telecom is currently trading around the HK$2.64 level. The stock is up by a third, but this still only represents 0.48 times price-to-book and a consensus forward price-to-earnings (P/E) ratio of 8.16 times, according to S&P Global Market Intelligence data.

At their 2015 peaks, the three telcos all enjoyed P/E multiples in the high teens. The question is whether A-share investors – keen to support the country’s national champions – will help them to get back to those levels again.

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