While telecom is generally written off by many as a less exciting, defensive sector, investors would be wise to not use that same brush to paint the Chinese telecom industry. Following a landscape-changing period of industry consolidation two years ago, China’s telecom players are facing increased competition to roll out more advanced 3G technologies and gain subscribers in China’s more rural regions.
“Rural penetration is low because six years ago, there was not even infrastructure. Telcos had to first wait until electricity and basic infrastructure was available in certain areas in order to even set up networks,” explained Cynthia Meng, a telecom analyst at Bank of America Merrill Lynch (Asia Pacific) Ltd. “I think infrastructure is much, much better compared to six years ago. In the markets where it’s already penetrated, telcos are waiting for consumption levels to improve so that there will be some degree of consumption upgrade. Then the rural subscribers will be able to spend more money as compared to the early years.”
Currently wireless penetration in China is just over 60%, with the average penetration in Central and Western China sitting below 45%. Given the Chinese government’s stimulus program and urbanization initiatives, consumption upgrade and penetration-rate increases will be the driving growth forces for China’s three telcos, China Mobile, China Telecom and China Unicom.
“The industry dynamic has changed,” Meng said. “I think it is exciting and people haven’t really noticed the change after the industry restructuring. It’s about time to take another look.”
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