Industry in a "transformational stage";
China Mobile still dominates
The Chinese telecom industry is in between an emerging-growth market
and a developed-mature market: Traditional performance metrics that
investors have used to value China’s telecom industry are now less
meaningful. Instead, new metrics, such as quality of customer and growth
potential of new value-added services (VAS), are becoming more useful.
In our view, internal core competencies will be the key differentiator in
the medium term; solid and comprehensive management capabilities and
strong execution will play a vital role in sustaining long-term growth.
3G technologies are merely air interfaces: We believe that far too much
emphasis is being placed on 3G as the be all and end all. In our view,
which 3G protocol is being used does not matter as long as it can deliver
data to users’ satisfaction. Executing effectively in this transformational
stage will require managerial prowess beyond deploying networks.
Moreover, we believe the real battle for wireless data will be fought in the
value-added-service market.
BUY China Mobile; dominance will be hard to shake: Investors have
misguidedly sold down China Mobile owing to a lack of understanding of
the industry transformation. Although China Mobile is facing stronger
competition post restructuring, we believe it is still the most attractive
company in the Chinese telecom sector, on account of 1) its dominant
market position and significant advantages in VAS; 2) solid and
comprehensive internal competencies; and 3) attractive valuation with an
Implied Equity Risk Premium (IERP) of 14.1%, higher than the 5-10%
historic ERP, and 2009F EV/EBIT of 7.6x vs. 10.3x global average.
HOLD on China Telecom; short-term pain, long-term gain: We are
positive about the company’s long-term outlook, thanks to its strong
growth potential in the wireless business and strengths in full-service
operations. However, we are also concerned about high margin pressures
stemming from promotion of the new wireless business in the near-term
and accordingly assign a HOLD rating.

Table of contents
Executive summary........................................................3
Investment thesis ..........................................................6
Industry overview and outlook.....................................10
Key drivers and trends.................................................19
Market structure and competitive landscape..............27
Industry restructuring and asymmetric regulations ....48
TD-SCDMA and 3G........................................................51
China Mobile (0941 HK); BUY ................71
Investment thesis ........................................................................... 72
Valuation ......................................................................................... 75
Earnings outlook ............................................................................. 82
Build up the edge in VAS — Mobile Music ...................................... 94
Cash flow and balance sheet........................................................100
Investment considerations ...........................................................103
Company overview........................................................................105
Company structure........................................................................111
Company strategy .........................................................................113
Risks to our investment recommendation....................................116
China Telecom (0728 HK); HOLD.........121
Investment thesis .........................................................................122
Valuation .......................................................................................124
Earnings outlook ...........................................................................130
Cash flow and balance sheet........................................................143
Investment considerations ...........................................................145
Company overview........................................................................147
Company structure........................................................................155
Company strategy .........................................................................157
Risks to investment recommendation..........................................159