Policy shift leaves China's telco sector wide open

Foreign investors are given green light for increasing investment in China''s telco and internet industries.

StockHouse LogoIn a major policy shift, the Chinese Government will repeal a rule barring the cable television and telecommunications industries from each other's businesses. Upon receiving a license, cable TV operators are now allowed to offer internet services, while telecoms companies will be allowed to offer television services.

The policy shift signals a green light for foreign companies seeking to tap into China's booming telecoms and internet markets. Analysts believe that companies which already have cable network operations in China, including Shanghai Industrial [363] and Shum Yip Investment [604], will be direct beneficiaries. The implications for CITIC Pacific [267], on the other hand, are mixed.

Liu Cai, director general of policy for the Ministry of Information Industry (MII), said in Beijing at the end of last month that the change was aimed at spurring competition to strengthen the telecoms industry. He added that the two industries would still not be allowed to produce TV programming. The creation of such content would be left to China Central Television (CCTV) and local State-controlled broadcasters.

stockhouse cable picUnder current regulations, the Chinese Government bans cable operators from offering internet services while telecoms operators are not allowed to transmit audiovisual signals. The MII's decision came as China commits to open its domestic telecommunications market to foreign investors upon its World Trade Organization (WTO) accession. China's 10th five-year plan has called for the convergence of telecommunications networks, cable TV networks and computer networks in order to better utilise resources. To that end, China must adjust its policies so that foreign companies can participate without breaking existing rules and regulations.

Despite the general setback suffered by telecoms counters in Europe and the US, international investors still believe Asia’s telecoms industries have large upsides as penetration rates remain low. In a recent Asian telecoms report, UBS Warburg said, “Asia is different from Europe in that Asian telecom companies' returns and capital expenditures are growing at the same pace.”

The relaxation in telecoms regulations prior to China's entry into the WTO is set to benefit Shanghai Industrial, Shum Yip Investment and CITIC Pacific. All three companies have exposure to cable TV or telecoms markets in mainland China. The valuation of their assets will be greatly enhanced under the new policy as they will be able to provide internet, telephone as well as television services, utilising their existing networks. Furthermore, as the Government is expected to issue fewer operational licenses going forward, in order to avoid wastage in infrastructure, all three companies will enjoy first mover advantage. However, as a result of a lack of sufficient data, the direct benefits to three companies is difficult to quantify.

CITIC Pacific spent Rmb1.2 billion ($145 million) to acquire a 32,000 km fixed fiber-optic network, China Express No 1 backbone network, from the Guangzhou military in January of this year. More than 20,000 route kms of fiber have been laid on the network, according to the Company. The central ring comprising Beijing, Wuhan, Shanghai, Guangzhou and Shenzhen will be operational shortly. The network was originally designed for commercial data transmission. However, since restrictions have been lifted, it can also be used to transmit TV programs. CITIC Pacific enjoyed a 30% discount in the acquisition price. The price now looks even more favorable with the relaxation of the rules regarding cross competition.

In addition, CITIC Pacific is currently in the process of acquiring a 50% stake in CITIC Guoan. CITIC Guoan recently completed the acquisition of a 49% interest in each of two cable TV operators in Qihuangdao (Hebei Province) and ZhouKoi (Henan Province) at the end of last month. Following the acquisitions, CITIC Guoan now has six regional cable TV networks in China. The completion of the China Express No 1 backbone network will facilitate CITIC Pacific's efforts to build a nationwide computer and TV network. However, the drawback in the face of the rule change is that the acquisition price for CITIC Guoan may have to be renegotiated upwards. CITIC Guoan also will likely have to pay higher prices to acquire other cable TV networks.

The Shanghai Government has been aggressively developing its information technology industry in recent years. The IT industry generated 6.1% of the city's GDP last year. The Government believes this can be lifted to 15% by 2005. Shanghai Industrial, the Municipal Government's listed window company, will not be left out of this growth. It recently acquired a 20% interest in Shanghai Information Industry, the Shanghai Government's information technology investment arm. Independent valuations put the investment in Shanghai Information Industry at HK$1.413 billon ($181.19 million). It is the main investor in Shanghai InfoPort, which currently has investments in 19 projects, including:

  1. Shanghai information network: The network will use the latest wideband ATM backbone technology to provide ATM and IP services to enterprises and telecom operators. 
  2. Shanghai cable network: The Municipal Government is pioneering the country's first multiple provider-access wideband network that makes possible the integration of the city's cable TV, computer and internet networks. Shanghai CATV currently has 3 million users. This year will see 1million households equipped with two-way cable TV access. Shanghai CATV is also contemplating more than a dozen multi-media and value-added services and is seeking to expand its services to the whole country.

The total investment in Shanghai InfoPort over the next five years is expected at Rmb70 billion.

According to the Management at Shum Yip Investment, the Company will increase its stake in Shenzhen Topway Video by 20% to 41.1%. Topway Video's main asset is its cable TV network in Shenzhen, which currently has 360,000 subscribers.

Copyright: StockHouse Media Corporation