Telco Services
Trimming into year-end results
Our store visits indicate that slowing economic growth, the ramp-up of 3G and
rising competition will make 2009 much tougher than 2008 for sector profits. We
recommend trimming stakes heading into FY08 results in mid to late March. But
our 12-month preference order remains ChinaTel, China Mobile, Unicom.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
China Mobile¹ 0941.HK Dec 2008 Hold HK$69.30 HK$69.00 5.78 10.60
China Telecom¹ 0728.HK Dec 2008 Buy HK$2.76 HK$3.80 0.17 14.20
China Unicom¹ 0762.HK Dec 2008 Hold HK$6.98 HK$7.70 0.46 13.50
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Source: Company data, ABN AMRO forecasts
Economic slowdown likely to hit carriers more in 2009 than in 2008
In January 2009, we visited around 100 stores in six markets. Weakness in exports and real
estate has hurt mobile and fixed-line revenue. (Anecdotally, it takes an average of 3,000
mobile calls to purchase an apartment, finish it and furnish it.) These factors started to
emerge in selected coastal markets in 2H08, particularly after October. In 2009, we expect
the economic slowdown to impact more sectors and geographies, creating greater downward
pressure on telecom revenue growth yoy.
Intensifying price competition: deeper and early V-curves
The stores we spoke to said they were probably seeing the most intense promotional efforts
of the past several years, mainly from ChinaTel and China Mobile. As such, we expect
greater ARPU pressure in 2009, rising churn, and higher sales & marketing expenses. The
potential upside for 2010-11 is such that competition may greatly stimulate mobile and fixed
broadband penetration and usage growth, just as intense pricing competition in 2004 led to
large increases in mobile penetration and usage growth. These developments likely mean
deeper and earlier V-shapes in ChinaTel and Unicom’s earnings in 2008-10F and reduced
earnings growth at China Mobile in 2009F and 2010F.
Trimming estimates and 12-month TPs, incrementally more positive on China Mobile
For ChinaTel, we cut our net profit forecasts for 2008 and 2009 by 23% and 20%, to 23.0%
and 25.5% below Bloomberg consensus. For China Mobile, we trim our net profit forecasts
for 2008 and 2009 by 1.3% and 4.6%, to 3.4% and 8.7% below consensus. For Unicom, we
estimate net profit of Rmb32.2bn in 2008 and Rmb11.0bn in 2009, which is 8.9% and 11.9%
below consensus. We cut our 12-month target prices on Buy-rated ChinaTel (from HK$4.0 to
HK$3.8), and Hold-rated China Mobile (from HK$75 to HK$69) and Unicom (from HK$10.9 to
HK$7.7). ChinaTel and Unicom 2008 results in mid to late March could disappoint, but, after
that we see ChinaTel shares gaining support from a monthly improvement in CDMA and
broadband subscribers; Unicom shares staging intermittent rallies on a potential iPhone tieup
and (on-time) WCDMA launch; and China Mobile shares coming under pressure on
concerns about competition taking high ARPU internet mobile subscribers.

Contents
Store visit takeaways: intensifying price competition and slowing top-line
growth 3
From early to mid January 2009, we visited about 100 stores in six markets: Beijing,
Shanghai, Chongqing and Shenzhen, Guangzhou in Guangdong province, and
Nanjing in Jiangsu province. Below we highlight our key takeaways.
3
Revised estimates and investment recommendations 6
Company profiles 10
China Mobile 11
China Telecom 24
China Unicom 37