Looking for a good reception

Two decades ago a ranking of China’s most valuable A-share firms was dominated by energy-intensive counters such as Baosteel and Huaneng. Much of the market was off-limits to foreign investors but domestic interest was relatively low too.

One of the principal reasons was that many of China’s more exciting companies were listed offshore. Sina – the Chinese equivalent to Yahoo in the frenetic dotcom era ­– went public in New York in 2000. State-owned China Mobile, which was on its way to taking the title of the world’s largest telecom carrier, sold shares in Hong Kong, not on the mainland.

Over the years the calls grew louder for the most valuable Chinese firms to come home to a more ‘international bourse’ in Shanghai. Local investors got their wish in November 2007 with PetroChina’s A-share listing. More than a million of them subscribed for the IPO of what was then Asia’s most profitable firm. More jumped in on the first day of trading, which saw the oil producer’s shares surge to Rmb48 ($7.6), or three times as much as PetroChina’s Hong Kong and New York-listed stock.

Unfortunately that marked the all-time high for PetroChina’s A-shares, which slumped spectacularly in the following months. As of this week, they were worth less than Rmb5 each.

Painful experiences like this one helped to inspire a colloquial expression among retail investors that they are the bourse’s “chives” (a popular filling for making Chinese dumplings). The nickname alludes to how retail investors were often stuffed with losses by powerful market insiders. Many of them learned from the process, steering clear of the blockbuster share offerings of the large state-owned enterprises (SOEs) that followed.

But chives can sprout soon after their stems are cut away. With that in mind, will retail investors put some of the unhappier times behind them as China Mobile – another SOE heavyweight – finally comes to market in Shanghai?

A company on the move

Together with fellow carriers China Telecom and China Unicom, China Mobile was ordered to delist from US stock markets, courtesy of Donald Trump’s presidential executive orders last year. The trio of SOEs departed the New York Stock Exchange earlier this year.

Similar to other firms that have been dropped by US bourses, such as chipmaker SMIC, the telecom giants have been granted a warmer homecoming. In China Mobile’s case, it was given the green light last week by the China Securities Regulatory Commission to go public on Shanghai’s main bourse in what should be the biggest A-share IPO since Agricultural Bank raised Rmb68 billion in 2010. Approvals took less than six months, after the carrier made its initial application in May.

China Mobile plans to sell 965 million new shares, or 4.5% of its enlarged capital, with an overallotment option (or greenshoe) of 145 million more shares if demand for the offering is strong. It says it will deploy up to Rmb56 billion of the funds raised in high-priority areas such as 5G and cloud infrastructure.

Assuming Rmb56 billion is its final fundraising size, the Shanghai IPO would be priced at about Rmb58 a share (pre-greenshoe). As of this week, the telecom giant’s Hong Kong-listed shares were trading at HK$48 (about Rmb39), or barely 70% of its net book value.

Are investors still in love with telecom carriers?

The first state carrier to test the water in the A-share market was China Unicom. Via China United Network Communications (CUNC), it went public in Shanghai in late 2001.

CUNC has no active operational business but owns an 82% stake in the BVI vehicle which controls 53.5% of the Hong Kong-listed China Unicom. This ‘grandparent’ of China Unicom has rarely dipped below its Rmb2.3 IPO price, although trading volumes have rarely been spectacular. As of this week it was trading at Rmb4.

China Telecom also went public in Shanghai after raising Rmb54 billion (post-greenshoe) in August this year. Unfortunately the country’s largest fixed-line operator rekindled some of the misgivings of the ‘chives’ about investing in large SOEs. Despite a promising trading debut in which China Telecom closed 35% higher than its Rmb4.53 offering price, the shares fell the 10% daily limit for the next two days. China Telecom has since been trading below its IPO price, closing at Rmb4.2 on Thursday with its Hong Kong-listed stocks faring much worse at HK$2.61 apiece.

China Telecom’s lacklustre performance on the Shanghai exchange saw some retail investors mocking its IPO as a “telecom fraud”, a reference to the plague of phone calls made by scam artists (see WiC537).

In a bid to shore up the shares, China Telecom announced in late September that its unlisted parent would purchase up to Rmb4 billion of its A-shares over the next 12 months. But financial bloggers were soon questioning the carrier’s investment case. “An IPO story could hardly get more embarrassing than this: a company buying back its own shares aggressively barely a month after selling them,” one scoffed on WeChat.

There are also questions about whether the domestic market has the appetite for two Rmb50 billion telecom sector IPOs in such quick succession.

“Investors probably won’t be too generous on China Mobile’s valuation, even if it is the industry leader,” Caixin Weekly predicted, citing sector analysts. “Capital flowing to its IPO may mainly come from other SOEs or retirement funds.”

Does China Mobile have a growth story?

When Alibaba and Tencent first set up shop in the late 1990s, China Mobile was the darling of international investors looking to profit from the China growth story (there’s a good section on the company’s compelling investment case from this period in Herald van der Linde’s new book Asia’s Stock Markets: From the Ground Up). The telecom giant basked in the attention as China stepped into the world of 4G, becoming the most valuable firm on the Hong Kong exchange.

But its appeal started to wane for investors as the smartphone and social media era picked up pace. Like other mobile carriers, China Mobile poured massive investment into high-speed 4G. But it was players in online shopping and social media like Alibaba and Tencent that benefited most, walking away with the supercharged profits.

In fact, China Mobile’s market capitalisation was about HK$980 billion ($125 billion) this week, only about a fifth of Tencent’s. Once a market-mover in Hong Kong’s benchmark Hang Seng Index, its weighting has declined, dropping to about 3% from a peak of more than 10% in the early 2000s.

A slew of policies by the Chinese government in more recent times was supposed to be positive for China Mobile’s prospects, especially the push into 5G and the associated spending on telecoms under the “new infrastructure” banner (see WiC488).

Beijing’s crackdown on internet platforms like Alibaba – underway since last year to counter what regulators have judged as their anti-competitive behaviour – has also brought suggestions that fund managers could allocate more of their capital to steadier and more politically-connected state-backed heavyweights (see WiC522).

There isn’t much sign of that yet for China Mobile, however. The carrier’s shares have climbed 9% this year but that modest gain is largely a rebound from earlier lows triggered by Trump’s delisting order.

Since announcing its intention of an A-share IPO in May, the company’s share price has actually dropped almost 3%.

China Mobile is no longer a high-growth pick, although it has been trying to convince the investment community that it still has a story to tell. Prior to getting the listing approval from Shanghai regulators, it reported a 6% increase in net profit for the first half of this year, helped by a 13.8% increase in revenues. That was the fastest sales growth in recent memory, fuelled partly by higher income from corporate users for new services such as 5G and cloud. Company literature promises much more growth to come, too, from what it terms the “blue ocean” of digitalisation.

Even if you put the ‘growth’ story aside, few could argue with China Mobile’s status as one of the most stable dividend payers of the past 10 years. Investors buying it today receive a yield of more than 7% on shares trading at seven times 2020 earnings. And its prospects also look reasonably assured, because of its contribution to the backbone of the 5G revolution set to sweep the Chinese economy.

But whether China Mobile can shift its status from a safe choice to a more spectacular one really depends on how much of the upside it can capture from the 5G era. It will be determined to grab more of the gains than it managed during the transition to 4G, which means doing much more than selling 5G data packages to its subscribers. Hence it is one of a number of mobile carriers investing in metaverse platforms that blend the digital world with real-life environments. One of its candidates as a new ‘killer app’ of its own is Mobile Cloud VR, a platform where users can watch 360-degree content like movies, concerts and sports events. There are other plans to reach out more directly to consumers with technology that allows virtual-reality socialising and shopping.

Of course, the 5G transformation also brings heavy spending commitments. Fortunately the telco is still one of the most cash-rich SOEs. In 2020 it generated more than Rmb127 billion in free cashflow, holding Rmb374 billion ($59 billion) in cash reserves at the end of June. That was more then enough to buy outright Vodafone – another of the world’s largest mobile networks with 300 million customers.

Cash resources like that mean that China Mobile doesn’t really need to raise funds from a Shanghai IPO, sector analyst Fu Liang told CBN, a Chinese newspaper. But the company still wants to go ahead as part of a plan to share some of its “development achievements” with local investors. And for retail shareholders who still need convincing to take the plunge, China Mobile has prepared for the worst as well. In its prospectus, it promises a safety net for the first 36 months after its Shanghai debut in which it will buy back its shares if its stock price dips below net asset value for 20 consecutive sessions.

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