For Differences Among China’s Big Three Telcos, Look to Their Regulator
This week’s Tech Talk takes us away from China’s boisterous internet sector and into the stodgier world of telecoms, which has become a major focus with the ongoing rollout of 5G services. That’s a highly political story, with China now suddenly in 5G overdrive as it races to keep step with the developed world in rolling out state-of-the-art wireless networks that will enable the data-intense apps of the future.
But the headline that got me thinking about China’s big three telcos this week was far more mundane, namely a report that the trio was nearing completion of trials of a number portability system and would be rolling out the capability nationwide at the end of next month.
For those unfamiliar with this concept, number portability allows people to keep their phone number even when they change carriers, for example going from China Mobile to China Unicom. Such portability is important because lack of ability to keep your phone number was traditionally a major deterrent for people to change carriers due to the hassle factor.
Such portability has been available for more than a decade in my native U.S., and in fact has been “on trial” in China for about a decade as well. But in China the move was being driven by the telecoms regulator and resisted by the carriers themselves for obvious reasons, since it encourages people to change carriers. Such anti-competitive behavior is par for the course for the trio of China Mobile, China Unicom and China Telecom, which are all big state-owned behemoths that mostly move in unison based on orders from their regulator, the Ministry of Industry and Information Technology (MIIT).
When I first started covering the industry nearly two decades ago, I actively sought out interviews with these three companies and tried to find differences between them, even though such opportunities were and remain rare. That’s because all three of these companies are largely led by faceless bureaucrats who move seamlessly from one carrier to another, and also take up occasional stints with the regulator, in a game run out of Beijing.
I finally came to realize all this perhaps six or seven years into my stint on the China tech beat, and now find it convenient to look at this group — as well as the regulator — as a single entity rather than the three publicly traded companies Beijing wants us to see.
As a case in point of how much of a snooze executive movements within this group have become, longtime China Mobile CEO Li Yue resigned earlier this month due to reaching retirement age. Of course there were a few headlines, since China Mobile is the world’s biggest wireless carrier with nearly 1 billion subscribers. But the truth of the matter is there was very little discussion about how his departure would affect the company, since longtime industry followers knew it would probably have little or no impact.
Look to the regulator
The lack of major differentiation between the trio was on display again this week, when China Mobile and Unicom reported their latest quarterly results. Both reported slightly declining revenue in the first 9 months of the year, continuing a trend that’s been going on for the last few years as growth in China’s mobile market slows after years of breakneck expansion.
The pair did show differing profit trends, with Unicom’s 12% profit rise contrasting sharply with China Mobile’s 14% decline. I’ll come back to that element shortly, as it does seem to hint at some true differentiation we could see between this otherwise nondescript trio in the next few years. As if to acknowledge that these two companies are part of the same beast, shares of both fell after their results came out.
Interestingly, China Mobile now trades at a price-to-earnings ratio of 10, while Unicom is about twice that and China Telecom was slightly higher at 12. That indicates investors like Unicom the most, and China Mobile the least.
All that brings us back to the question of differentiation, and whether there’s any way to tell one company from the other. I polled a few analysts who cover these companies, and not surprisingly, none really wanted to comment that specifically on the subject. Most hid behind the excuse of not wanting to talk about specific companies without permission from their big bosses, which is perhaps partly true.
But I also suspect that many of those honestly feel the same way I do, namely that these three are mostly different limbs on the same body and thus not easily differentiable. That said, the valuation difference does seem to indicate people feel more positive about China Unicom and China Telecom to a lesser extent, which does seem worth some exploration.
As I’ve said before, management has nothing to do with any of this. After all, the current head of Unicom, Wang Xiaochu, was previously head of China Telecom and China Mobile before that. Instead, the key to understanding the difference lies more in the regulator’s attitude toward them. In this case, the regulator seems to be far more sympathetic to Unicom and China Telecom these days, since the pair are far smaller combined than China Mobile – which alone commands about 60% of the total market.
That favoritism has most recently come out in the regulator’s decision to let Unicom and China Telecom co-build a 5G network, while China Mobile must build its own network independently. Such a move will save the smaller pair tens of billions of dollars, which is likely to filter down to their bottom lines, explaining at least part of the more positive view investors have toward the pair.
But as anyone who has been in China long enough knows, political winds can easily shift overnight. Accordingly, industry watchers and investors need to be able to spot the signals for changing regulatory attitudes towards this group, or really any similar sector dominated by a small group of state-run behemoths.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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