Top Theme for 2009: prepare
to tough out demand weakness
􀂄 Cutting industry aggregate revenue on macro weakness
Overall economic slowdown, price competition, anticipated 3G and forced PHS
migration costs point to a year full of challenges for the industry. We are reducing
our aggregate industry revenue and profit growth estimates across the board to
4.3% and -5.9% FY09 versus 6.9% and 4.1% FY08, respectively.
Mandated PHS migration: increasing subsidies, churn to CM
Current regulatory measures are not designed to be in favor of new entrants: fixed
line operators are requested to complete PHS migration in 3 years and give way
to TD spectrum, forcing operators to accelerate PHS migration through increased
handset subsidies, and see a surge in churn to competitors, primarily to CM.
Reiterate Buy CM. TD support up the ante for competition.
Despite concerns about 3G competition and softening macro economy, China
Mobile remains our top pick as it benefits from 2G dominant competitiveness,
early stage 3G, reactivation of services by returning migration workers given rural
stimulus, and pro-TD regulations potentially stalling competitive effectiveness.
Reiterate Buy, new PO HK86, down 4% due to DCF rollover.
CU: downgrade to Neutral, PO cut by 31% to HK$9
Our Buy call on CU didn’t work out as expected and the stock underperformed both
CT and CM. We expect limited new positive catalysts near term while improvement
in fundamental results may take longer to materialize given the weakening of the
economy. We revised down our subs forecasts in both GSM and broadband,
accelerated PHS migration and increased handset subsidy estimates. Revenues for
FY09E and FY10E are cut by 1.8% and 4%, respectively. Valuation is at par with
emerging Asia peers at current valuation level. We will wait for evidence of 3G
uptake in late 2009 to revisit our investment thesis.
Reiterate Underperform on CT, PO cut by 10% to HK$2.7
CT has been actively managing down expectations that fundamentals on CDMA
and fixed line will remain challenging for 2009-2010. Valuation multiples on
revised earnings still look unattractive at current levels with FY09 P/E of 14.6x,
19.7% premium to regional peers. We need to see tangible evidence of bundling
effectiveness and CDMA2000 ARPU improvement for us to be bullish on CT.

Telecom: Top Four Themes for 2009
The Chinese telecom industry is entering into the Year of Ox with abundant
challenges and uncertainties. We identify top four themes in the telecom industry
in 2009:
1. Weakened macro environment pressures top-line growth outlook
2. Wireless data price cut – collectively a preemptive move prior to 3G
3. Pro TD-SCDMA regulatory measures could hinder CM’s competitors
4. 3G starts from smart device proliferation
In the context of these top themes, we are reducing our aggregate industry
revenue, EBITDA and profit growth estimates across the board to 4.3% and
-5.9% and 2.9% FY09 compared to 6.9% and 4.1%, and 19.4% FY08,
respectively.
The official expectation: the MIIT forecasts overall telecom services industry
revenue to grow at 6% YoY in 2009; this compares to the official disclosure of 7%
overall industry revenue growth rate in 2008.
ML forecast: Given our cautious stance towards the demand outlook, we are
estimating 4.3% in FY09 in overall revenue growth rate versus 6.9% in 2008.
In anticipation of intensified competition, tariff fall, increase in churn and SAC, we are
estimating 2.9% profit growth (without PHS write-off at CT and CU fixed line, a more
accurate reading of the industry profitability) versus 19.4% in 2008 for the industry.