TELECOMS: Singapore Likes China Telecom, But Does Anyone Else?

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Bottom line: GIC’s investment in China Telecom represents a vote of confidence in the company over the next 2 years, as it makes strong gains in 4G and data services and could become more aggressive under new leadership.

GIC bets on China Telecom

China’s smallest wireless carrier China Telecom (HKEx: 728; NYSE: CHA) has just received a vote of confidence from one of the world’s better-known global investors, with the new disclosure that Singaporean sovereign wealth fund GIC has purchased 5 percent of the telco’s Hong Kong-listed shares. That decision comes amid mixed signals coming from China Telecom, which has just received new leadership after its former chairman was booted out for corruption. On a more positive note, China Telecom has been posting strong growth in its year-old 4G business, though the foundation for that growth was largely laid by yet another previous leader who left the company about a year ago.

According to the new disclosure, GIC was quietly building a position in China Telecom stock, and its additional purchase of 12 million shares late last week pushed its holdings to the 5 percent threshold. (HKEx announcement) At China Telecom’s most recent share price, the investment translates to about $300 million, a fairly large sum.

We should start out by noting that GIC and sister company Temasek are strong believers in China, and that both names frequently appear in this kind of investment news. That has served the pair well over the last decade when China was booming, but has been more problematic recently as the economy shows signs of a sharp slowdown.

That slowdown led Temasek to report a 9 percent drop in the value of its portfolio in the first quarter of this year, marking the fund’s first decline since the height of the global financial crisis in 2009. (English article) China Telecom’s shares have fared relatively better over that period, and at current levels are now roughly flat with the start of the year.

China Mobile Dominates 4G

From an investor perspective, China Mobile (HKEx: 941; NYSE: CHL) is still probably my preferred bet among China’s big 3 telcos. That’s because it’s easily the largest of the trio, and has been able to hold onto its two-thirds market share for the last decade despite the regulator’s attempts to create a more advantageous environment for China Telecom and China Unicom (HKEx: 763; NYSE: CHU), the third operator.

What’s more, China Mobile has become the undisputed leader in China’s 4G market after receiving a license more than a year ahead of its 2 rivals because it was using a new untested technology. The company had more than 70 percent of China’s 4G market of more than 500 million subscribers as of mid-year, thanks to aggressive promotion. But China Telecom also was adding subscribers quickly, with 40 percent of its users now subscribing to 4G service despite its late arrival to the game. (previous post)

From a valuation perspective, China Mobile and Unicom are roughly the same with price to earnings (PE) ratios of about 15. China Telecom is a bit lower with a PE of about 12, which may be one of the factors that attracted GIC. News of the investment didn’t excite shareholders too much, with China Telecom stock rising 0.3 percent in the latest trading session in Hong Kong.

From a much broader perspective, I frankly don’t have much interest in any of China’s big 3 telco stocks. That’s because all 3 are laggards in terms of innovation, and have missed numerous opportunities for growth to more nimble private companies like Tencent (HKEx: 700) and Momo (Nasdaq: MOMO). But that said, if I did have to pick one of the trio it would probably be China Mobile. China Telecom might be a close second, especially at its current low valuation and under new a new chairman whose leadership may accelerate the company’s drive into 4G and data services.

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