60% Cell Phone Penetration Rate In China Creates Competitive And Fast Growing Opportunity For Investors According To All Star Analyst From Bank Of America Merrill Lynch
October 8, 2010 - The Wall Street Transcript has just published 2010 Investing in China Special Report offering a timely review of the Communications Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Cynthia Meng joined BofA Merrill Lynch in 2007. She was ranked in the TMT (telecom, media and technology) category of the 2010 Institutional Investor All-China survey for her coverage of the greater China telecom services and telecom infrastructure sectors. Ms. Meng has 11 years of experience in global telecom, including time spent as a Management Consultant advising telecom operators on a wide range of strategic and operational issues, and advising investors of distressed telecom debt in North America and Europe. Ms. Meng holds an MBA from the Kellogg School of Management at Northwestern University, in the U.S.
TWST: What are the major trends in the Chinese telecom industry at the moment?
Ms. Meng: Let's focus on three trends at the moment. Trend one: Competition has intensified. A little bit of history - there was a telecom industry consolidation in 2008, where two fixed-line companies - China Telecom (CHA) entered into wireless through the acquisition of the CDMA businesses of China Unicom (CHU), and China Netcom was merged into China Unicom. Prior to 2008's industry restructuring, there were four carriers - two wireless and two pure fixed-line operators, which were not allowed to go into wireless. Now we have three operators competing in wireless business, two of which are integrated operators and the third one, China Mobile (CHL), is a pure wireless operator. There's much more competition compared to before.
Trend two: 2009 was historically the highest year in terms of cap ex spending. Overall industry cap ex in 2010 is down by 23% compared to last year. On the other hand, operating expenses in terms of marketing costs and handset subsidies are significantly up as operators compete to fill up their brand-new and relatively empty 3G networks before reaching profit breakeven scale on 3G.
Trend three: As more and more mid- to low-end smartphones are introduced to the market, all three operators are trying to develop data and value-added applications in order to generate more revenue sources, as the voice revenue is not growing much on the wireless side and is declining on the fixed-line side. Fixed-line revenue going down is a worldwide trend that's called fixed-to-mobile substitution - more people are only using wireless and are cutting fixed lines.
TWST: What is the supply and demand balance like at the moment?
Ms. Meng: We have a wireless penetration of over 60% right now. China has 1.3 billion in population. In general, developed markets' overall average penetration rate is 135% to 150%. Many people carry more than one or two phones. In my view, the 60% penetration rate should be viewed in two different ways. One is the urban market, where penetration rate is quite high. In the East Coast, penetration rates in the metropolitan cities, like Beijing, Shanghai, Guangzhou, Shenzhen, are all over 100%. While in Central and West China, with a lot of rural areas and interior China, penetration rate is relatively low, at below the 45% rate. So the major growth is in Central/West China. In the developed East Coast area, in the bigger cities, it's very, very competitive and there is basically no subscriber growth anymore, and the game for operators is replacement of or stealing market share from each other.
TWST: In the western cities, are there particular factors limiting the growth of cell phone usage? Is it simply a penetration question or is it an economics question?
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