In July 2006, SK Telecom purchased $1 billion worth of convertible bonds issued by China Unicom listed on the Hong Kong Stock Exchange. SK Telecom converted the bonds into shares in August 2007.

SK Telecom said the proceeds will be used to boost its financial health, launch a fixed-line and mobile convergence business in China and fund research and development projects.

* SK Telecom converted the bonds into shares in August 2007.

-- Intense competition, weak profit growth

The following table shows key indicators of the three carriers' business performances in the third quarter of this year. Main indicators of China's three carriers' operating performances in Q3, 2009 China Mobile China Telecom China Unicom Operating revenue (bln yuan) 114.064 52.194 38.492 EBITDA (bln yuan) 57.824 20.217 14.53 EBITDA margin (%) 50.7 38.7 37.7 Net profit (bln yuan) 28.606 2.98 1.872 Net profit rate (%) 25.1 5.7 4.9 Mobile service subscribers (mln) 508.37 46.78 142.8 (Source: Quarterly report of the telecom operators)

China Telecom reported operating revenue of 154.75 billion yuan in the first three quarters, up 15.3 percent year on year. Its EBITDA and net profits were respectively 65.57 billion yuan and 11.39 billion yuan, down 3.9 percent and 33.9 percent from the same period last year.

According to BOCOM International Holdings (BOCOM International), China Telecom's significantly fallen net profit was induced by sharply increased costs for network operation support and sales management, a repeat from the first half.

The following Chart 1 shows key indicators of China Telecom's operating performance in the first three quarters.

China Unicom achieved operating revenue of 114.93 billion yuan from January to September, including 111.82 billion yuan from communications service, accounting for 74.1 percent of the total in 2008. The profit was 9.34 billion yuan, representing 1.19 times of 2008's total.

China Unicom and Spanish telecom operator Telefonica de Espana signed a share swap contract valuing one million US dollars on September 6. By the third quarter of this year, the recognized fair value of swap contract triggered by the growth of Telefonica's share price was 960 million dollars, which greatly contributed to the carrier's performance growth.

The following Chart 2 shows key indicators of China Unicom's operating performance in the first nine months.

Both China Telecom and China Unicom saw their net profits lower resulting from their scale construction of mobile networks this year. Besides, with the intensification of industrial competition, the telecom operators' sales and market promotion expenditures are continuing to increase.

Brokers held that with the continuous investment into 3G business and equipment depreciation, the carriers' profits will continue falling until 2010. In comparison, operating revenue shows telecom operators' improved performances, and that the three maintained stable growth.

Another factor to have dragged down the performances of China Unicom and China Telecom was the Personal Handyphone System (PHS) which is gradually fading from the market. According to statistics released by the Ministry of Industry and Information Technology, China lost 2.35 million PHS subscribers in September, hitting a historical high in a single month.

Since China Telecom didn't reveal individual department performances, BOCOM International showed worries about the deterioration of the carrier's fixed-phone service and sluggish mobile phone business.

China Mobile returned to smooth performance after a second quarter drop. The telecom giant respectively registered operating revenue and net profit of 326.98 billion yuan and 83.94 billion yuan in the first three quarters, up 8.9 percent and 1.8 percent year on year. The firm's net profit rate remained high at 25.7 percent.

The following Chart 3 shows major indicators of China Mobile's operating performance in the first nine months.

The year-on-year growths of China Telecom's operating income in quarter terms were respectively 15.1 percent, 14.5 percent, and 16.4 percent; while China Mobile's operating income grew 8.9 percent on year in the first half and remained stable over the first three quarters.

China Mobile's average revenue per user (ARPU) dropped to 75 yuan from 90 yuan earned a few years ago, and usage per minute declined from 0.154 yuan per minute in the first half to 0.153 yuan from January to September.

According to an S&P report, the decline was induced by rapid growth of the user base in low-price rural regions, and pricing pressure from competitors' expanding market shares. In the third quarter of this year, China Mobile cut international roaming fees, as well as those in Hong Kong, Macao, and Taiwan, with the average price more than halving.

Industrial competition among telecom operators has become increasingly intense under high market concentration. Intensified competition is making it more difficult for firms to achieve high profitability. But in the long run, competitive pressure will force firms into innovating, exploiting market potential, enhancing industrial chain cooperation, and increase the efficiency of management, operations and marketing. This will help the telecom industry enjoy longer-term prosperity.

-- 3G effects starting paying off

China Mobile's average additional users per month in the first three quarters of this year reached 5.68 million, taking the industries' lead. But since subscribers to its paramount 3G services merely increased to 1.66 million by the end of September, it might be difficult for the carrier to hit the yearend target of three million users.

The telecom giant depends on its existing resources to boost its homegrown TD-SCDMA (TD) 3G business. BOCOM International said China Mobile's promotion of the OPhone operating system and the online application store Mobile Market aims at protecting the user base.

Shenyin & Wanguo Securities pointed out that because of TD's disadvantage in 3G networks, few great handsets, and slow network construction, high-end users will migrate to other 3G networks. China Mobile will continuously leak market share to the other two firms.

China Unicom's 3G business was not taken into consideration as the business was rolled out on October 1. The firm's general manager Lu Yimin said on October 30 that its 3G user base exceeded one million in one month.

Guosen Securities held that since a number of key mobile phone sales channels are selling 3G cell phones, including the iPhone, China Unicom's additional 3G users will increase faster with the entire industry's help, and its 3G user base is likely to top three million by the yearend. Meanwhile, China Unicom is expected to attract some mid- and high-end users, raising its average ARPU.

But Guotai & Junan said that China Unicom's iPhone service package's high prices and lacking WiFi functionality may deaden user passions.

China Telecom added 7.5 million mobile service subscribers in the third quarter, boosting the total number to 46.78 million. At present, the carrier's share in terms of additional users increased from 12 percent in January to around 30 percent in September, showing a prosperous trend. But in comparison with the first half, China Telecom's ARPU in the third quarter was slightly down, and the minutes of usage (MOU) declined 0.4 percent on quarter to 330 minutes, revealing that the net additional users are mostly of low-end.

Broker reports said that the robust growth of China Telecom's new subscription counts are due to its outstanding marketing capacity and bundling sales strategy, but the telecom operator is disadvantaged in cell phones in terms of the price and models, and weak third-party sales channels may obstruct its CDMA services from developing further.

-- Growth of value added services slows

Since 3G value added services lack popular applications, and competition of 2G value added services is becoming increasingly intensive, the development of such services faces new challenges.

Statistics show that China Mobile's value added service subscribers were 459 million, about the same as last year. Because of fierce competition in the additional user market and a large user base, the user number growth of China Mobile's value added services such as wireless music and multimedia messaging slowed. This may dry up business revenue and force it to develop new growth points.

But the usage of China Mobile's text messaging services increased 12.9 percent year on year, achieved continuous growth on the basis of an already great user base, but no other value added service is capable of matching the success of text messaging services.

China Unicom's local fixed-phone users rebounded from net loss of 482,000 in August to a net growth of 508,000, representing the effectiveness of the carrier's bundling service strategy.

Securities broker Mainfirst said that China Unicom's wireless cell phone service revenue increased 10 percent quarter on quarter from July to September, higher than the 9 percent of China Mobile. The former's MOU and ARPU of the service respectively increased 7.3 percent and 1 percent on year, comparing to China Mobile's 6 percent and negative 8 percent over the same period, indicating that China Unicom's strategy for acquiring high-end users has taken effect.

The former China Unicom Ltd. offered USD 1 billion worth of convertible bonds to SK Telecom as early as July 2006 with an exercise price of HKD 8.63 per share. In September 2007, the South Korean telecoms operator converted the bonds into 899.75 million shares or a 6.61% stake, which was diluted to less than 4% after China Unicom Ltd. was integrated with the former China Netcom Group Corp. (Hong Kong) Ltd. into present China Unicom.

Source: www.enet.com.cn (November 06, 2009)