China Mobile Hong Kong (CMHK) announced yesterday that it would spend US$3.65 billion to buy mobile networks in 10 Chinese provinces from its parent.

After the acquisition, the world's biggest mobile-phone operator by number of subscribers will expand its service areas to all 31 provinces on the mainland.

The networks are in the mainland's least developed areas, where penetration rate is only 16.8 per cent - suggesting growth potential.

The acquired companies' forecast combined net profit may be around 3.117 billion yuan (US$375 million), said the company in a press release. Therefore, the acquisition value represents a consideration of approximately 9.69 times 2004 net profit.

This compares to a price-to-earnings ratio of 11.6 times for the Hong Kong-listed company.

"The price-to-earnings ratio of 9.69 times 2004 profits is a fair one," said Samuel Chua, a research analyst at KGI Asia.

"The added acquisitions will represent only about 10 per cent of CMHK's market capitalization. So whilst the deal may not excite investors too much, on balance, it is still a fair one."

Chua said that the deal would not be a big drain for CMHK. "After the acquisition, China Mobile Hong Kong will have a net gap of between 25-30 billion yuan (US$3-3.6 billion) which it should be able to pay back within one year to 18 months."

CMHK will pay US$2 billion in cash to the parent company from internal cash resources and the remainder over 15 years. Taking into account the acquired companies' debt of US$469 million, the enterprise value of the acquisition is US$4.12 billion.

The company had a total capitalization of 243.4 billion yuan (US$29.4 billion) at the end of last year, with cash and bank deposits totalling 56.4 billion yuan (US$6.8 billion).

CMHK said the acquisition should boost its earnings per share this year by 6.5 per cent to 2.037 yuan after amortization of goodwill. Its last similar acquisition in 2002 boosted profits by 2.7 per cent.

The 10 companies have an average market share of 64.3 per cent and a total of 24.5 million subscribers, out of a nationwide total of 280 million. This means that CMHK will have a total of 166 million subscribers, calculated by 2003 year-end pro-forma combined accounts.

According to analysts, this latest deal is unlikely to attract much interest from investors. Hong Kong-listed telecoms companies are widely perceived to have already secured all the most profitable networks already, and now are scrambling for China's poorer networks with thinner profit margins.

"The deal is not too exciting for investors," says Edward Feng, an analyst with Kim Eng Securities. "For these type of poorer provinces, the profit margin is lower than for CMHK's existing markets."

Since the acquisition will be the last for CMHK, the company will have to rely on cost control and organic growth for its profits, he added.

CMHK made four acquisitions in the five years to 2002, having bought 19 networks from its parent.

The deal follows in the footsteps of other mainland telecoms companies listed in Hong Kong to buy cut-priced networks from their parent companies on the mainland.

China's largest fixed-line operator China Telecom earlier announced a US$3.36-billion purchase of 10 networks from its State-owned parent company.

(HK Edition 04/29/2004 page23)