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New China Telecom offer unlikely to impress; fundamentals unchanged

China Daily

China Telecom Corp Ltd's move to attract more institutional investors by slashing its IPO offer size to boost EPS potential is unlikely to impress, as it provides very little in terms of improved valuations compared with its domestic competitors, analysts said.

Analysts tracking the IPO are sticking to their initial recommendations of not buying into the stock, as there are still no compelling reasons to do so.

They also highlighted the fact that the 55 percent cut in the size of the offer may make China Telecom a less obvious choice for inclusion into MSCI indices, thereby also making it less attractive to funds.

There are also concerns that by offering a smaller portion of shares for sale, there may be the threat of further cash calls as the company seeks to acquire networks from its parent and given stock exchange requirements to increase the free float level from the current 10 percent.

China Telecom earlier confirmed its relaunched IPO will cut the total initial offer size by 55 percent to 7.556 billion shares, while sticking to its original selling price range of HK$1.47-1.69 (18.8-21.6 US cents) per share.

The company is proposing to fix the offer price when the New York markets close on November 6 and is scheduled to list in New York on November 14 and on November 15 in Hong Kong.

The Hong Kong public offer will be launched on November 6 and will close midday on November 11.

Macquarie Equities (Asia)'s regional telecommunications analyst, Abhijit Attavar maintains there is still no compelling reason to invest in the IPO.

"The change in the IPO size probably makes the book more manageable, but does not offer any tangible advantages to the investor," he added.

"Because there is less dilution of new shares, the PE has marginally improved to 11.2 times earlier to 10.3 times on 2003 earnings but it is still pretty much in line with China Mobile's 10.3 times for 2003 earnings.

"I don't see enough of a valuation discount (in the new offer). They are not changing the DCF (discounted cash flow) value or enterprise valuations. There is just a change in the capital structure which doesn't change other (financial) ratios," he said.

Attavar would have preferred a pricing discount of at least 10-15 percent.

He said prior to the offer size scale-back, China Telecom was an obvious candidate to join China Mobile in the relevant MSCI and other major benchmark indices.

But with the reduced allocations, China Telecom's free float will be worth an estimated US$1.4 billion, against China Unicom's 1.8 billion and China Mobile's 11.8 billion.

Attavar also raised concerns China Telecom's total dividend payout in 2003-04 will be nearly the same as the US$1.3 billion raised in the IPO, assuming the company pays a dividend yield of 4.5 percent.

He also criticized the company for failing to take the opportunity to improve its disclosure standards, especially as regard to the lack of visibility on asset injection proposals and the regulatory environment in China.

Sun Hung Kai Research's analyst, Florence Cheung, described the revised offer as "no big deal".

With regulatory risks in China so high, she is also urging investors not to subscribe.

"Fundamentally, nothing has changed. They (the government) wants to push (the listing) of China Netcom next, so why buy now?"

She agreed the improved PE valuations do not offer sufficient reason for investors to take up the shares.

An analyst with a foreign brokerage said she is looking at a PE ratio of 10.1-11.6 times for 2003 earnings, which is not very different from China Mobile's 11 percent.

"It will all depend on the pricing of the offer shares," she said.

The analyst said the response to the IPO will wholly depend on whether the revised offer meets the expectations of institutions.

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