China Unicom, the mainland's second biggest telecommunications operator, plans to sell 86 million American depositary shares in the US and Canada, 73.8 million ADS in Europe and 73.8 million ADS in Asia. Each ADS will represent 10 underlying shares. The company will offer 122.9 million shares to the public in Hong Kong. There is also an overallotment option of 36.89 million ADS, bringing the total number of shares on the block to 2.95 billion. If all the shares are sold at the top end of the new range, the company could raise HK$47.2 billion ($6.05 billion). The company had previously offered the shares at between HK$11.50 and HK$14.50.
"The strength of demand indicates a hunger for an alternative to China Telecom," says David Webb, an independent investor and editor of webb-site.com. "China Telecom has been overvalued for a long time because it's priced as though it will always be a monopoly in the territories in which it operates, and that's not a working assumption over the next few years."
Still, Unicom has a long way to go to catch up with Telecom and there are sufficient risks to justify a discount to Telecom, investors say. China Telecom priced shares in its 1997 initial public offering at HK$11.80 to raise $4.56 billion. Over the past year the shares have risen 270% to HK$66.25. They've risen 461% from their offer price.á
"The concerns I'm hearing from my clients are that Unicom's paging and data businesses are not worth much and that the cellular side is supporting the total valuation," says Andy Perkins, analyst at Prudential-Bache.á"Since the company is going to have to spend a fortune to try to get it up and running, that constitutes a big execution risk."
Growth rate slowing for paging business
Unicom derives more than half its revenue from its 43.5 million paging subscribers. The company is the biggest paging operator in China, with a 59% market share. That's smaller than the 68.9% share it held in 1997. While the number of paging subscribers in China increased to 73.7 million in 1999 from 47.2 million in 1997, the growth rate is slowing. At the same time competition among operators has increased. The country now has 1,700 paging companies. Analysts expect the paging business as a whole to shrink over time as consumers turn towards mobile phones and other, more sophisticated wireless devices.
Analysts also say there's no assurance that Unicom will succeed in developing its fixed long distance and data services business. The company offers broadband data and internet protocol services in 50 cities, yet revenue from the business accounts for just 0.5% of its 1999 revenue of $2 billion. The company says it plans to increase these services to include leased line, frame relay, asynchronous transfer mode û a data transmission service that uses a high-speed open protocol developed for high data rates û virtual private network services, internet access and web hosting services. It plans to have these services up and running in 220 cities by the end of 2000. But these plans are tooáamorphous to value, analysts say.
So it's the cellular business that offers most hope for the future, and Unicom's cellular service is in its infancy compared to that of rival China Mobile, the cellular phone business previously operated byáChina Telecom. China Unicom had 4.2 million cellular subscribers at the end of 1999, or 14.2% of the market. That's up from 338,900 subscribers in 1998, or 7.1% market share, but pales next to the 25.1 million subscribers, or 85.8% share held by China Mobile. To compete, Unicom has been forced to reduce its prices by as much as 20% in some areas, putting pressure on its margins. The company expects to offset narrowing margins with higher subscriber volumes.
The cellular market in China has expanded 215% to 43.2 million in 1999 from 13.7 million in 1997. That represents an increase in market penetration to 3.4% from 1.1%. The market for fixed line subscribers is growing almost as fast, expanding 54% to 108.8 million in 1999 from 70.3 million in 1997, according to the Ministry of Information Industry. That represents an increase in market penetration to 8.6% from 5.7%. In theory, at least, both markets offer significant potential for growth.
Heavy loss in cellular arm
But it's not just the quantity of users that's important. In 1999 Unicom's cellular business, which represented 30.5% of revenue, lost Rmb80 million ($9.6 million) after a one-time charge of Rmb224 million relating to the termination of its China-China Foreign joint ventures. The company expects to record another charge of Rmb1.194 billion in relation to these ventures in 2000. Excluding these charges, operating income from the cellular business rose 678% to Rmb951.2 million in 1999 from Rmb122.2 million in 1998.
However, the average revenue per subscriber per month dropped from Rmb317.4 in 1997 to Rmb231.9 in 1998 to just Rmb165.8 in 1999.áThat's muchálower than the Rmb300 average revenue per subscriber generated by China Telecom and indicates that Unicom's customer base is less wealthy and more prone to churn. Unicom has managed to increase its subscribers by cutting tariffs, but its provisions for bad debts have risen correspondingly. In 1999 the company put aside Rmb193.2 million for bad debts in its cellular business, up from Rmb121.3 million in 1998 and up from just Rmb32.5 million in 1997.
To stem the tide of bad debts, Unicom plans to expand its pre-paid service from the few cities in which it is offered to all areas of its coverage range by the end of this month.
"We believe that the pre-paid services will significantly increase penetration in the low-usage market because of the elimination of connection and monthly fees," the company says in its prospectus. "We also expect pre-paid services to reduce our bad debt expense."
With all its risks, however, Unicom is clearly not a stock investors can ignore. Last month Hutchison Whampoa, Hong Kong's largest conglomerate and no ingTnue in making savvy investments, agreed to buy $400 million of Unicom's shares. The company already owns a stake in China Telecom. Hutchison's planned investmentáis clearly doing nothing to hurt the listing. The IPO is set to price in New York on June 16th.
