Credit: Shutterstock photoChina Unicom (Hong Kong) LimitedCHU and China Telecom Corp. Ltd.CHA , the second and third largest mobile phone carriers in China respectively, have reportedly entered into an agreement to share their resources for various strategic initiatives. The partnership is being largely seen as a strategic cooperation to challenge the dominance of the much larger China Mobile Limited CHL . Presently, China Mobile enjoys a 63% share of the Chinese mobile market in terms of subscribers, far ahead of the combined 36% market share held by China Unicom and China Telecom.
The Deal
Network sharing of rural 4G infrastructure is one of the key components covered in the agreement. China's 4G market is growing at a fast rate and these two companies foresee a large opportunity in the rural sector to grow their customer base. Such strategic cooperation is expected to provide 40% savings in capital expenditure versus building the infrastructure alone, thereby generating positive returnfor the companies. In addition, further synergies of about 50% savings in operational costs will make way for a higher return on investments in the long term.
Other plans like promoting a high end 'six-mode' smart phone capable of supporting various bands, developing new ventures for creating innovative services, and improving customer experience also find priority in the agreement.
Is a Merger in the Cards?
After a recent consolidation of Chinese carriers to spin off their tower assets as a separate entity called China Tower, rumors regarding a possible merger between China Unicom and China Telecom were found doing the rounds. Thus, it will not be surprising if this cooperation agreement is widely considered by the market as a precursor to a merger. However, it must be noted that the Chinese government is keen on promoting competition among state-backed firms in order to induce innovation and make services more consumer friendly. Thus, it is unlikely that the regulators will allow a full fledged merger between the two companies in the near future.
The Bottom Line
While there are certain definite synergies that will emerge through the collaboration, it remains to be seen how revenues will be shared by the companies. The pricing too, needs to be competitive if the two are to offer a challenge to China Mobile. We believe, given a growing 4G market and increasing rate of wireless penetration in China, there couldn't have been a better opportunity for the two companies to join hands in order to emerge as a bigger power.
China Unicom presently carries a Zacks Rank #3 (Hold) whereas China Telecom has a Zacks Rank #4 (Sell). A better-ranked stock in the same category is Philippine Long Distance Telephone Company PHI , with a Zacks Rank #2 (Buy).
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CHINA TELCM-ADR (CHA): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
