China Unicom

Listed in Hong Kong and New York for less than three years, China Unicom is already recognized as a leading blue chip, with access to the fastest-growing telecommunications market in the world. The company is the second-largest mobile telecom services provide in China with just under 60 million subscribers, using Global Standards Mobile (GSM) as well as Code Division Multiple Access (CDMA) The company recently announced profits of Rmb 1.3 billion ($157 million) for the first quarter of this year. Zhang Baoying, deputy head of the finance department talks to FinanceAsia about the company's plan to issue a bond this year and the role of bank financing.


How would you describe your current borrowing strategy?

Zhang: We currently rely on bank financing rather than bond issuance. We have Rmb 9 billion in short-term liabilities and Rmb 43 billion ($52 million) in long-term liabilities. Our strategy this year is to increase our borrowing from the Hong Kong market, because comparative interest rates are lower. We're also considering a domestic or international bond in the near future.

How strong are your credit ratios?

The debt to equity ratio was 80% in 2002, while debt to EBITDA ratio was 2.3 times in 2002.We're more than satisfied with our interest rate cover ratio, which was around 10 times in 2002.
Are your debt levels expected to change in the near future?

In fact, this year we don’t expect a great change. That’s different from the recent past, when we were in an expansion mode and capex was rather large. As of last year, for example, our optical fibre transmission network reached 486,000 km and the optical fibre backbone network reached 110,000 km. However, we expect this year to be a milestone in terms of our cash flow. By some of our internal formulae, our cash flow will be positive and we therefore hope to finance from that.

But with record low interest rates, you must be tempted to re-finance.

Yes. We're looking to refinance our liabilities this year to take advantage of that, since around Rmb 5.5 billion of long-term debt is due to be repaid this year and Rmb 9 billion of one-year loans will also become due this year. Our main channel will be to raise the funds from Hong Kong-based banks, which offer cheaper funding. As mentioned, we are also looking at issuing a bond, but have made no decision in terms of tenor, amount or whether it’s to be in Hong Kong, or mainland China.

Would that include international bond issuance, or convertible bonds, which are popular in China right now?

We are certainly looking at that, although our day-to-day operations are in Rmb. We have also looked at convertible bonds. However, our stock price is rather low at the moment, given the global economic downturn, so we don’t think it’s appropriate to do a convertible bond right now. We’d rather wait for the stock price to go up.
Are you leaning towards the international markets or the domestic markets for issuing a bond?

As mentioned, the topic is under discussion. We have a problem in the sense that our parent company intends to issue bonds in the domestic market this year, and we can’t issue at the same time. So we’d have to issue internationally. But we don’t have a rating yet, being a relatively young company.

Actually, 100% of our business operations are in China, so domestic bond market financing would be advantageous from that point of view. But the domestic bond market is still quite undeveloped and issuance approval is slow and complicated.

What would be your ideal tenor?

We’d be interested in a 10 or 15-year bond to lock in current low interest rate. Generally, we’d like a varied portfolio of issuance, of three to 15 years. Around seven years is a suitable tenor for us, since that is the period we use for estimating our fixed asset depreciation

Would you use China Mobile, the parent of the Hong Kong unit, as benchmark, since it has issued a number of bonds domestically?

It is one of benchmarks. But the latest new issuance for a similar amount and with the same rating in market is more comparable. The industry sector is less important than the credit rating and the size of the deal. China Mobile hasn’t issued this year. So we’d look at a company that has issued and for a similar amount.

How would the coupon be decided on if you did do a bond issuance in China?

Looking at the deals done this year for a ten-year bond, it looks as if around 4.2% is the benchmark. But the central bank - the People’s Bank of China - and the Ministry of Finance would have to sign off on it.

At the moment, however, you rely primarily on bank financing. Why is that? What are the advantages?
For a combination of reasons, partly historical. Banks have always played an important role financing companies in China. But there’s an obvious downside given that global interest rate falls mean that the cost of financing in China is higher than it is internationally. Chinese interest rates are not set by the market, but administratively. We pay around 5.5% for a one to three-year loan, but we could pay three percentage points less than that in Hong Kong. On the other hand, we would need government approval from the State Administration of Foreign Exchange (SAFE) for every transfer from Hong Kong banks to the mainland. On the upside, bank financing is something we are comfortable with, since we have good connections with the banks and it’s very flexible. We can negotiate extra loans very easily. Of course, another consideration is tenor: bonds tend to be for longer tenors. However, we find the tenors provided by banks, from one to five years, quite suitable for our needs. 

How does your status as a Hong Kong-incorporated company affect your borrowing strategy?

Yes, we are a red chip. However, we can also issue bonds in the domestic markets through our Beijing-based subsidiary company, as well as accessing the international market through the Hong Kong-listed company. So we have as many or more channels compared with an H-share company, that is, a company incorporated in China.

You don’t have a credit rating. Is that likely to change any time soon, and who would you compare yourself to? And don’t you think a rating would help the investor community understand you better?
There’s no doubt that a rating would help us and our investors to focus on our strengths and weaknesses. Of course, if we plan to issue bond, we will get credit rating first. 


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