Chinese telecom stocks: A trio of wireless plays

"There is still a lot of wireless growth potential in the world's most populated country," notes Geoffrey Seiler, in an intriguing and in-depth review of the leading China telecom companies.

In BullMarket.com, he looks at China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), and China Telecom (NYSE: CHA) noting, "We would expect all three to grow for the foreseeable future."

"China Mobile is the undisputed king of mobile from a subscriber base standpoint. Through the end of June, the company boasted 493 million subscribers. The company boasts 70% of the Chinese market.

"The next two providers are China Unicom, which claimed 140 million users as of June 30th, but growth was just 800,000 from May, followed by China Telecom, with 39 million users.

"While still growing, the pace at which the industry is adding subscribers has slowed in the last year. In part it is because the major urban markets are getting saturated.

"All three have stepped up efforts to woo people in China's vast rural areas, offering low-priced plans and heavily subsidized phones. It is estimated that 50% of potential users have already signed up for cell service in China, but with a population of 1.3 billion, there is still a big potential market.

"China's mobile market is also undergoing the same transformation that is taking place in other parts of the world: existing customers are flocking to higher-priced broadband services.

"The government awarded 3G licenses at the beginning of this year to each of the three mobile providers. This is one slice of the market where analysts think the smaller China Unicom may have an advantage.

"China Mobile was awarded the license for a homegrown version of the 3G standard. Unfortunately for China Mobile, the standard is not compatible with the iPhone, which instead will be introduced in China by Unicom later this year.

"The awarding of the 3G standard to China Mobile is widely viewed as the government's way of leveling the playing field a bit between China Mobile and its two smaller mobile rivals.

"China Telecom was awarded the license for the CDMA 2000 standard, while Unicom is implementing WCDMA. Both are considered easier to implement, and WCDMA already claims 70% of the world's 3G users. It is the preferred standard of the major U.S. and European carriers.

"Unicom recently announced that it would begin trials of its 3G wireless network in 168 more Chinese cities. The nation's two most important cities, Beijing and Shanghai, were among the first to get the high-speed network.

"Unicom hopes to launch the popular iPhone  as early as October. If the iPhone proves to be as popular in China as it has become elsewhere in the world, it could be a major competitive advantage for the company among high-end users.

"China Telecom is the smallest mobile player, but it is one of China's largest fixed-line providers. It dominates the fixed-line telephone and broadband market in southern China where it serves 250 million customers.

"But the company faces increasing competition from the mobile providers, which is why the government split out the CDMA component of China Unicom's business and gave part of it to China Telecom last year.

"To counteract the erosion of its traditional phone business, China Telecom is pushing its broadband Internet access and other value-added offerings like caller ID and short messaging for growth. Non-voice business services are also growing. 

"The company is reported in talks with Research in Motion about introducing new BlackBerry models according to a recent news report. China Mobile has offered a BlackBerry for a number of years, but the device has not caught on with Chinese users.

"In another move, China Telecom struck a deal with the country's top search provider, Baidu. Under this agreement, Baidu's wireless search service will be embedded in China Telecom's Best Tone 3G phone modules.

"China Telecom mobile subscribers will be able to use the Best Tone platform to access Baidu products including Web search, image search, news search, MP3 search, and other services.

"Japan's Sharp, meanwhile, plans to introduce its own smartphone into the Chinese market later this year. It will release at least one phone apiece for China Mobile and China Unicom. The Swedish phonemaker LM Ericsson has a similar deal.

"All three companies saw their shares pummeled in the late 2008, early 2009 turmoil. After hitting their respective troughs in February and March of this year, the sector has come roaring back.

"China Telecom has been the top performer on a year-over-year basis as its shares are nearly back even with year-ago levels, up about 40% since the start of 2009. China Mobile's shares are still about -20% below their levels of last summer, while Unicom is still down about -30%.

"Wall Street is generally negative on China Telecom, neutral on China Mobile, and moderately bullish on Unicom.

"Of the three Chinese mobile providers, our take is that Unicom looks to be in the best position for a short-term burst from its launch of the iPhone. The device has helped AT&T in the U.S., and we suspect it will also prove popular with both business users and the youth in China. 

"Unicom also seems to have gotten the best of the 3G licenses. The government clearly seems intent on reining in China Mobile a bit. China Telecom needs to ramp up its mobile offerings and keep pushing broadband to business since its traditional wired segment will no doubt remain under pressure. 

"The bottom line, however, is that there is still a lot of wireless growth potential in the world's most populated country. As such, we would expect all three to continue to grow for the foreseeable future."