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China Telecom Corp. Ltd. Message Board

  • two_ltl_2_late two_ltl_2_late Mar 3, 2004 11:24 AM Flag

    Jynhui -- seeking update on advice

    As you may recall, I seek your advice (which I hold in the highest regard) every 3 months or so. Back about 9 months ago you suggested a list of about 5 chinese stocks from which I selected CHA, PTR, and HNP for what I call my my personal chinese mutual fund. It has done quite nicely overall. I'm still a bit short of one year so to sell has a modest short term gain penalty.

    However, I'm a bit worried about some of the indications I'm seeing -- especially the CHA dilution, but also the HNP rate business.

    So, what say you now? Short term? Long term? Better to swap into something with a better reward/risk over there?

    Happy Investing.

    Two Little Too Late

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    • I think reading P/L statements for Telecom companies is rather tricky. I used to work for the Bell System before and after the divestiture. The tricky stuff has always been how you depreciate your asset. After the divestiture, the government allowed a much faster depreciation schedule by virtue of technological advances.

      For example during last November's acquisition of the 6 provinces, analysts criticized CHA for an accounting practice that allow them not to write off the goodwill of the asset acquired. Now the value of the asset sometimes is pretty irrelevant, it is the earning power and operating margin that counts. In the telecom industries, depreciation is so fast but the copper in the ground is making very good money though you may have written it off entirely.

      I checked the 2002 result announcement of CHA, and it seems they had a 157% increase of profit, simply because they written off so much of their asset in 2001. In other words, they clean up the book for listing in 2002. They had zero writeoff in 2002, and hence a fabulous P/L statement.

      So the big question in PE in 2004 is whether there will be big writeoff. But as I said before, that is pretty much irrelevant.

      I am not an accountant and know very little of how to make the book for investor's consumption. Ultimately, it is the earning potential of the asset that counts, and for that count, CHA is in very good shape. What is uncertain is whether the next 11 provinces will have good operating profit (which is a good 30% from the announcement for the first 4 provinces).

      In comparison, China Netcom which plans to IPO 2H04 was in the red last year and hope to be profitable this year to the tune of about 100 million yuan (or $). So it seems that China Telecom politically was able to get the best for itself on divestiture (they got more provinces, the richer provinces, and the more profitable provinces).

      FYI, Y02 annual report for CHA. Note that last year result was announced April 24. I hope it could be earlier this year.

    • Very important point; thanks.

    • Thanks, just opinions.

      I would appreciate if you can provide a link to the statement "the parent company of CHA, reported 8% increase of revenue, 64% increase of profit for the whole year of 2003."

      Since CHA just went public in late 2002, the P/L statements before and after listing can be quite tricky to interpret because of asset shuffling. I think the 64% increase of profit for the parent could be some sort of artifact. That also may have no direct relationship to the profit increase of CHA in 2003.

      The relationship between the parent and the child often is only in terms of accounting. In practice, the parent and the child are very much the same company. You can see that not only in CHA, but also in HNP, PTR, CEO, and CHL. In 1998 when CHL first listed in HK as a HK company, they only had a floor in Central. CHL is a real spinoff from China Telecom though because of the nature of the business. But in the other cases I cited, the management is very much the same and one.

    • Jynhui is great, and it is delighted to read your opinion. One thing I may add: the parent company of CHA, reported 8% increase of revenue, 64% increase of profit for the whole year of 2003. Sounds to me the company is in the sweet zone of operation leverage, we will wait to see whether CHA can post similar increase. Most importantly, the lagging long distance service also posted a increase after serveral year decrease, consider the higher profit margin of long distance call, this development is quite positive. When will CHA release its result for 2003?

      My source says that CHA has been celebrating for the good year of 2003.

    • Setting aside the embedded CHA fundamentals, it is reality that the threat of any follow-on equity offering raises exaggerated fears of "dilution" and increases short sales activity. This creates buying opportunity for those with a longer investment horizon.

      Of course, if the fundamentals are misunderstood, the long side is for naught. The probabilities seem relatively high, however, that this collective transaction is a major positive step forward for CHA. Hope we can continue to share information as the story plays out. Thanks.

    • Well, You got me there.

      Let's wait and see what are the subjects and terms of acquistions.

      Thanks for your insight.

    • I think paying short term capital gain should be a concern unless your tax bracket is low.

      CHA has seen a lot of volatility lately, which if you read some of my posts here generally is unjustified. The dilution effect is less than 5%. The increased earning far outweighs that. I think CHA will issue pro forma PE justifying the purchase and that would clear up a lot of the speculative shorting.

      HNP has been stellar. I don't think the utility rate is an issue. It has gone up recently by .6 fen per kwh on grid for HNP, and the retail price has gone up 2 fen per kwh. Jingjun on the HNP board, who works for HNP, mentioned rate reduction in Shandong by 2 fen per kwh. HNP has about 30% of its capacity in Shandong. The on grid price for HNP in the Shandong Dezhou plant is about 36 fen per kwh (0.36 yuan) so the effect is there but not that serious. The major earning driver of HNP is increased production from increased consumption and new plants and acquisitions from parent, quite likely in 1H04.

      PTR is benefiting from a rapidly rise in natural gas consumption and a sustained high oil price.

      The trailing 2003 PE of CHA, PTR, and HNP are roughly 11, 10, and 16.

      Let me do a little of comparison here. In terms of growth, you have CHA > HNP > PTR. In terms of being expensive, you have HNP > PTR > CHA. (You need to discount PE of oil because of the current high oil price and price volatility). In terms of stability of earning, you have HNP > CHA > PTR.

      So I would put a accumulation recommendation for CHA taking advantage of recent weaknesses, a hold for PTR, and a short term sell HNP because of sustained high share price, if you have to sell.

      Overall the very long term, I think all three shares will continue to appreciate in share price, with CHA > HNP > PTR.

      If you need reasons not to sell, I can give you three: First, results are coming up and you have good dividend for PTR > HNP > CHA. Second, likely acquisition announcements which would be positive for CHA > HNP > PTR. Third, a good chance that the yuan would appreciate 5% before the US election for which the positive effects are CHA > HNP > PTR.

      BTW, all three are the most defensive of all China plays if there is a downturn in the Chinese economy. I don't see one around the corner. If there is one, it is likely to be initiated by one in the US.

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