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1、ChinaGlobalEquityResearchCompanies mentionedand disclosures p.31Fung Ee Lim+852 2971 8599fung-Dylan Tinker+852 2971 Regulatory Trends in ChinasMobile SectorListed companies are affected as China adjuststelecoms regulations to follow global norms?Regulation drives share prices.One of the major driver
2、s of Chinese telecomsshare prices over the last few years has been regulatory change.?Trends favour fixed line sector.In this report we review the major regulatorytrends and explain why we believe these trends favour the fixed line sector overthe mobile sector.?Cautious on the mobile market.Regulato
3、ry uncertainty is a key reason whywe are cautious on the Chinese mobile market.Inside we describe the possibleimpact on China Mobile and China Unicom.Wireless Communications23 July addition to theUBS Warburg web siteour research products are availableover third-party systemsprovided or serviced by:B
4、loomberg,First Call,I/B/E/S,IFIS,Multex,QUICK and ReutersUBS Warburg is abusiness group of UBS AGRegulatory Trends In Chinas Mobile Sector 23 July 20022 UBS WarburgContentspageSection 1:Investment case.3Section 2:Underlying trends.5 1)Turning the sector into a FX earner.5 2)Independent regulation.8
5、3)New emphasis on basic services&West China.9 4)Adopting to global norms in regulations.11 5)Less relative support for the mobile sector.13 6)Support for CDMA.14Section 3:Results.16 1)Recent increase in spectrum fee.16 2)Possible four new 3G licenses.18 3)Establishment of a USO fund.18 4)Potential f
6、or more a stringent radiation standard.21 5)Potential imposition of CPP.24 6)Increasing support for China Telecoms PAS.25 7)Less mobile tariff regulations.26 8)Promoting import substitution.27Fung Ee Lim+852 2971 8599fung-Dylan Tinker+852 2971 Regulatory Trends In Chinas Mobile Sector 23 July 20023
7、UBS WarburgInvestment caseIn this report,we discuss the Chinese governments change in priorities and thedirection of regulatory reform.It is timely to focus on these issues as we believeregulatory changes have been the main factor affecting the share prices of the listedChinese telecos to date.We ha
8、ve concluded that the current long-term trends in telecoms reform will likelylead to changes that,as a whole,could be detrimental for the mobile sector andpositive for the fixed line sector.As a result,we remain cautious on the Chinesemobile sector and instead favour the telecoms sectors in Southeas
9、t Asia and Korea.We note that the regulatory reforms should be slightly more negative for ChinaMobile than China Unicom,due to issues such as support for CDMA,and thegrowing ability to discount tariffs(which is positive for the CDMA project).The trends.We note six major underlying trends in Chinas t
10、elecoms policy.Thesetrends are already starting to shape a new set of priorities in China.(1)Attempting to turn the sector into a net foreign exchange earner.Therehas been a concerted effort to turn around the telecoms sector into a net foreignexchange earner from a deficit sector.(2)New emphasis on
11、 basic services and western China.There is growingpolitical pressure to provide basic services in the less developed regions and tohave the costs borne by the richer operators.(3)Adopting to global norms in telecoms regulations.There is a growing effortto shift Chinese regulations in line with globa
12、l practices.This is partially aresult of Chinas entry to the WTO.(4)Less relative support for the mobile sector.The mobile sector has witnessedtwo large IPOs and four asset injections.The current priorities of theregulators are the China Telecom and China Netcom IPOs and the resultingasset injection
13、s.(5)Support for CDMA.CDMA represents the largest,single,annual investmentChina has ever made.There is strong pressure to view the project as a success.(6)Separation of telecoms regulation and operations.The Ministry ofInformation Industry(MII)does not now directly own equity in any telecomscompany,
14、and the high-level regulatory decisions are being made by the StateCouncil Information Commission(SCIC).The impact.We believe the impact of these changes should be largely negative forChina Mobile and slightly negative for China Unicom.Both companies havebenefited from the lack of regulation and com
15、petition in the sector to date and themove towards a more even playing field should have negative financialrepercussions.Below is a list of regulatory changes that could come about due tothe trends mentioned earlier.These changes are detailed in this report.Section 1Regulatory changes havebeen the m
16、ain factoraffecting the Chinese listedtelcos to dateWe note six underlyingtrends affecting Chinesetelecoms regulationRegulatory Trends In Chinas Mobile Sector 23 July 20024 UBS Warburg(1)Recent increase in spectrum fee.The recent imposition of a spectrum fee inChina shows how much pressure there is
17、to impose tighter regulations.(2)A possible four new 3G licenses.Although our models currently only reflecttwo new licenses being issued at the end of next year,we believe there is ahigh probability that four cellular licenses will be issued next year or in early2004.(3)Likely establishment of an US
18、O fund.It appears increasingly likely that aUniversal Service Obligation(USO)charge will be imposed on all Chinesetelecoms operators.The most probable scenario is a charge of 1%of revenue.(4)Potential imposition of more stringent radiation standards.There is thepossibility that a more stringent radi
19、ation standard will be approved in China.This would be a negative for mobile operators as more base-stations wouldhave to be deployed.(5)Potential future imposition of calling party pays(CPP).It does not appearlikely that CPP will be imposed this year.However,the growing popularity ofLittle Smart(wh
20、ich is CPP-based)should ensure that this issue is kept to thefore.(6)Increasing support for China Telecoms Little Smart(PAS)service.LittleSmart causes regulators trouble as it is considered a so-called backwardtechnology;however,its ability to increase teledensity in poorer areas hasimpressed the St
21、ate Council.(7)Less mobile tariff regulation.Due to the many underlying trends mentionedabove(popularity,basic services,backing for CDMA),we do not believe thatthe regulator will want,or will be able to,maintain high tariffs levels.(8)Promoting import substitution for the local industry.The governme
22、nt isvery supportive of the local manufacturing,distribution,and chipset industries,which affects China Mobile and Unicom as this support has driven the CDMAprogramme and has caused some initial problems(bottlenecks in CDMAproduction and distribution).Table 1:Summary of possible regulatory changesIm
23、pact on:LikelihoodLikely timingFixed line operatorsCellular operatorsRecent increase in spectrum feeHighAlreadyNegativeNegativeFour new 3G licensesHighH103EPositiveNegativeEstablishment of a USO fundHigh2002EPositiveNegativeMore a stringent radiation standardLow2003ENeutralNegativeImposition of CPPM
24、edium/Low2003EPositiveNegativeIncreasing support for China Telecoms PASHighAlreadyPositiveNegativeLess mobile tariff regulationsHighAlreadyPositiveNegativePromoting import substitutionHighAlreadyShort-term NegativeShort-term NegativeSource:UBS Warburg estimatesWe cite nine examples of howthese new t
25、rends areaffecting regulatorydecisionsRegulatory Trends In Chinas Mobile Sector 23 July 20025 UBS WarburgUnderlying trendsWe believe that there are six main underlying trends that will likely lead to newregulatory decisions in China.In order to gain an overview of future regulations,itis more import
26、ant to study the regulatory trends and new objectives than to attemptto guess which laws may be passed,in our view.We explain these six trends below:1)Turning the sector into a FX earnerWe believe Chinas apparent emergence as one of the largest markets in the worldis good news for telecoms hardware
27、vendors but bad news for the StateAdministration of Foreign Exchange(SAFE)from the perspective of foreignexchange outflows,in our view.Our talks with government officials suggestChinas import of telecoms hardware far exceeded exports,perhaps by as much as100 x according to some industry estimates.We
28、 believe the task of turning telecoms from a trade deficit sector into a net foreignexchange earner is probably the single most important strategic consideration forgovernment leaders and policy makers.One way or another,we believe thegovernment must play a role in propelling the local industry forw
29、ard.In ouropinion,there are three country-specific examples that the regulators have takeninto account:?Thailandtelecoms and devaluation in 1997.We have noted a number ofreferences in MII-sponsored newspapers concerning Thailand over the last year.The mid-1990s telecoms boom in Thailand was one of t
30、he main contributors tothe large US$debt-levels in 1997,which,in turn,pressured the currency.Therecovery of many Thai telecos was made more difficult after debt was re-valuedin baht at the new exchange rate.The Chinese authorities would want to avoid asimilar sequence of events,in our view.?Japandev
31、elopment of a national standard.Japanese manufacturers werepressured by MITI to develop their own telecoms standards,in order thatJapanese companies will have economies of scale and royalties will continue tobe paid to Japan after the standard is set.This appears to explain why Japan didnot develop
32、CDMA or GSM,but choose its own standardsPHS(PersonalHandiphone System)and PDC(Personal Digital Communicator).?Koreaboosting local manufacturers.We believe Koreas decision to insiston the adoption of CDMA for the countrys mobile carriers in the early 1990ssowed the seeds for the emergence of robust t
33、elecoms hardware vendors later inthe decade.We believe that China has noted these examples and this can be seen in the policydecisions.China is working on developing its own 3G standards(TD-SCDMA andLAS-CDMA)and is demanding that handsets be produced locally(importsubstitution)and that Chinese telco
34、s source from local companies.Section 2Large foreign exchangeoutflows from telecomsThe government wantstelecoms to be a net foreignexchange earnerRegulatory Trends In Chinas Mobile Sector 23 July 20026 UBS WarburgHow big is telecoms?The involvement of senior government officials in steering the futu
35、re direction oftelecoms underscores the strategic importance of the sector and its growingcontribution to Chinas overall economic development,in our view.?In terms of revenue,telecoms service providers represented approximately 4%of Chinas GDP in 2001,and this figure is rising fast.Under the 10th Fi
36、ve-YearPlan,the proportion is expected to reach 7.4%,based on projected revenues ofRmb710bn,by 2005E.By any measure,we believe telecoms is a pivotalindustry in China and is growing in importance.Chart 1:Telecoms revenue as%of GDP0%1%2%3%4%5%6%7%8%199119921993199419951996199719981999200020012002E2003
37、E2004E2005ESource:MIIChart 2:China telecoms market by revenue01002003004005006007008001990199119921993199419951996199719981999200020012002E2003E2004E2005ERmb bnSource:MII?In terms of equipment,telecoms service providers collectively spent a sizeableUS$34bn in 2001 with the lions share of the contrac
38、ts awarded to foreignvendors.Although China Mobile and China Unicom have publicly announcedplans to reduce capital expenditure for this year and next,the longer termoutlook is for more spending as teledensity rises from the current low levels.4%of Chinas GDP and risingChinese carriers spentUS$34bn o
39、n telecomsequipment last yearRegulatory Trends In Chinas Mobile Sector 23 July 20027 UBS WarburgChart 3:Telecoms capex05010015020025030019971998199920002001Rmb bnSource:CCID?In terms of handsets,Chinese consumers spent approximately US$10bn on over46m handsets last year.As Tables 1 and 2 suggest,for
40、eign brands accounted forover 90%of the market and enjoy price advantages over the local competition.Table 2:Handset market share(2001)BrandMarket shareMotorola27%Nokia23%Siemens10%Ericsson9%Samsung7%Bird5%Philips4%Alcatel3%Keijian2%TCL2%Other8%Source:CCIDThe lions share of economicprofit accrues in
41、 telecomshardware go to foreignplayersForeign brands dominate,butlocal brands are competitiveRegulatory Trends In Chinas Mobile Sector 23 July 20028 UBS WarburgTable 3:Prices of selected sub-Rmb1,000 GSM modelsRetail priceBrandTypeModel(Rmb)MotorolaForeignT2288500NokiaForeign5110I580EricssonForeignA
42、2816sc520SiemensForeign1118620PhilipsForeign288800AlcatelForeign0T301720SonyForeignCMD-J26950MitsubishiForeignTrium700EastcomLocalEL650950PandaLocalGM618790BirdLocalMC936760SouthecLocalS320700CapitelLocalC2000820CECLocal8068980Source:ENET,UBS Warburg2)Independent regulationIn the past,the MII owned
43、all telecoms operators and made all of the long-termpolicy decisions.Over the last few years,however,the MII has slowly becomedivorced from its ownership responsibilities and no longer makes high-level policydecisions.The SCIC,recently formed and headed by Prime Minister Zhu Rongji,isnow in charge o
44、f long-term policy matters.We believe the SCIC wieldsconsiderable influence due to the status of its members,despite being a lightlystaffed advisory body.Chart 4:Regulation and oversight of the Chinese telecoms sectorNewOwnerPreviousOwner,pre-1998To merge in the futureState Planning&DevelopmentCommi
45、ssion(SDPC)Ministry of Science&TechnologyMinistry of FinanceState Council LargeEnterprise Comm.State,Arts,Radio,Film&TelevisionMinistry of InformationIndustryState CouncilNational Peoples CongressTelecom operatorPreviousowner(98-2001)State CouncilInformation CommitteeSource:UBS WarburgStrategic tele
46、coms issues tobe decided at the highestgovernment levelsRegulatory Trends In Chinas Mobile Sector 23 July 20029 UBS WarburgSCIC differs from the MII as it concentrates on strategic issues concerning thenational interest and Chinas long-term development plans such as the promotion oflocal technology(
47、eg,3G),import substitution,and foreign exchange considerations.On the other hand,the MII,as one of Chinas top ministries,will now be enforcingthese long-term decisions and will concentrate on technical issues.Since many MIIofficials have links to China Mobile,we believe this is not a positive for th
48、e mobilesector.The MII now is responsible for:?Enforcing the national communications policy and developing projections.?Setting sector regulations for IT manufacturing,communications and software.?Planning public communications networks(local and long distance),broadcasting networks(over-the-air and
49、 cable),and other private networks.?Developing technical standards and specifications,managing equipment usedfor public networks and overseeing the quality of the product.?National frequency allocation for wireless services,and approving newfrequency bands and the services using these bands.?Setting
50、 and enforcing national postal and telecommunications fee policies;representing China at the signing of relevant regional and international treatiesfor China/foreign co-operation.3)New emphasis on basic services&West ChinaThe emphasis noted in recent speeches by President Jiang Zhemin of the need to