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China Telecom's Big PlansChina Telecom's Big Plans

As the carrier tries to relaunch its IPO, a company subsidiary is entering the US market. Courage or hubris?

November 1, 2002

6 Min Read
China Telecom's Big Plans

Some might call China Telecom Group courageous. Other would say it’s simply crazy.

While one of the Chinese carrier’s subsidiaries is attempting the largest public offering in Asia this year, another one is trying to go where no other Chinese telecom has gone before: The U.S. market (see China Telecom Sets Up Shop in US).

First off: The controversy surrounding China Telecommunications Corp.’s attempted IPO. The fixed-line carrier, which was hoping to complete an IPO yesterday to raise as much as $3.68 billion, has confirmed that it was unable to fix the offering price. The company’s shares could still start trading on the New York Stock Exchange (NYSE) on November 6 and on the Hong Kong stock exchange on November 7 if it manages to complete the offering by the cutoff date next Tuesday.

While the company has not given any reasons for its failure to set the price yesterday, news reports citing people close to the company state that the carrier fell victim to regulatory difficulties and poor response from international investors. While the domestic portion of the shares were fully subscribed, only 80 percent of the shares offered to international investors were filled, according to the reports. The company has apparently been forced to return the checks to the Hong Kong investors who have already signed up for the domestic portion of the offering.

Industry observers say that the lack of international investor interest is hardly surprising in the current financial climate. "It’s sort of amazing that they’re doing this now," Network Conceptions LLC analyst Farooq Hussain says. "I can’t see investors thinking it makes sense to have another global carrier… It would have looked perfectly sensible 2 or 3 years ago, but it’s completely out of phase at the moment.”

Another part of the controversy concerns a steep hike in international direct dial (IDD) tariffs announced by China Telecom on Monday. The carrier said that it will raise the amount it charges overseas carriers connecting mobile calls to its fixed-line network (now US$0.008 a minute) by as much as 850 percent. The tariff increase was widely considered to be an attempt by the company to boost its profits ahead of the IPO. Today, however, the carrier was expected to lower its planned increases following massive protests in Hong Kong.

The initial IPO plan included an offering of a 20 percent stake in China Telecom Corp., reducing parent company China Telecom Group’s stake in the carrier from 87 percent to 69.5 percent. Following yesterday’s failed launch attempt, however, the company is expected to scale back the offering by as much as 20 percent.

Hussain, however, doubts whether the carrier will be able to gain more support for the dual IPO on its second attempt. “Whatever is done to work around this problem is going to be a hard sell to investors who have already balked,” he writes. “In my opinion bringing the price down is as likely to further scare off investors as to attract them, since they are bound to wonder whether the new value may still be too high.”

In addition, he points out that the original price of HK$1.48 (US$0.19) the carrier was asking for was already reportedly very close to the company’s book value. This is important, because the Chinese “government prevents state firms from being sold to the public at less than book value,” he says.

China Daily, a state-run paper, reported today that the carrier is seeking regulatory approval to set a lower IPO price.

While China Telecom’s IPO-plans look a little wobbly, to say the least, some might say that China Telecom (USA)’s choice of timing to enter the U.S. market is a little risky.

Although some observers are now saying there are signs that the plummeting telecom market may be bottoming out, incumbent carriers in the U.S. are still facing colossal challenges. Many more are expected to go under or be forced to restructure before the telecom winter comes to an end.

China Telecom (USA) vice president Jun Wan, however, says that the company, which will be opening its Washington, D.C., headquarters on Monday, has found a sweet spot in the U.S. carrier market. “China Telecom (USA) is the first Chinese carrier to provide end-to-end service from the U.S. to China,” he says, pointing out that an ever-growing number of American companies are doing business in China, especially since the country was recently accepted into the World Trade Organization (WTO) (see Cisco's China Syndrome). “We hope we can provide the best service to those U.S. companies... Maybe later, we’ll also offer voice services to the Chinese community here.”

"It is certainly an interesting strategy," Peter Cohan, an analyst with Peter S. Cohan & Associates says, "but I wonder if there’s enough traffic between the U.S. and China [to justify it]... It’s hard to figure out how they’re going to come in and make it into a profitable business.”

Other observers, however, insist that the Chinese telecom market is going to become more and more important in the years to come. Craig Johnson, an independent analyst based in Portland, Ore., says that China will be the market that increasingly decides what telecom technologies get developed and deployed. “Remember, most of the rest of the Western world is already ‘in bed’ with their solutions sets (thus why ATM will not die, well at least not for several more years),” he writes in an email, “but China (and much of [the Asia Pacific]) is able to skip generations of solutions and thus represent a potential large chunk of sales dollars for telecom equipment worldwide.”

For American businesses trying to set up shop in China, already having a working relationship with a large, Chinese-state-backed company like China Telecom (USA) could help grease the machinery, and make things move more smoothly, Johnson says.

The Chinese carrier also has an advantage that U.S. carriers trying to serve American businesses in China don’t have, according to Network Conceptions’ Hussain. “Specifically, U.S. carriers are going to be disadvantaged in trying to obtain local loops at the China end for any U.S. customer, since China Telecom owns and operates that part also,” he writes in an email.

China Telecom (USA) is launching a suite of three products called ChinaDirect: Fully managed private line services from the U.S. to all points in China; direct IP connections to Chinanet; and an MPLS VPN service. The carrier already has points of presence in Los Angeles, San Francisco, New York, and Washington, and has its own submarine cable connecting the U.S. and China. Wan says the company has established relationships with several of the large U.S. carriers, and that it will primarily be leasing facilities and capacity to complete its U.S. backbone.

As for the troubled U.S. economy, Wan says he’s not worried. “I think this is a good opportunity for us to purchase or lease facilities at low prices,” he says.

— Eugénie Larson, Reporter, Light Reading

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