Hong Kong Telecommunications Report Q4 2008

The potential for private equity investors to break into the Hong Kong telecommunications market has been realised with the announcement that incumbent operator PCCW will divest its core telecommunications business into an independent unit under the name of HKT Group. Reports from Reuters suggest that as many as six private equity firms have expressed an interest for the 45% stake the operator is hoping to sell in the new company. Among those named were MBK Partners (South Korea), TPG, Providence Equity Partners, Macquarie Group, Bain Capital and Carlyle Group.

A major reason for the high level of interest is based on the companys steady cash flow, existing market status a dominant position in the fixedline and broadband markets, with a thirdranked spot in the mobile sector not to mention Hong Kong as a major gateway to the Chinese telecommunications market. All this is also occurring at a time when big, attractive targets are becoming scarcer across Asia.

While PCCWs cash flows are attractive, private equity firms will be limited to how much they are able to borrow to purchase the 45% stake, which could limit their potential returns from the deal, valued at US$2.5bn. Furthermore, any potential purchaser will need to meet the approval of PCCWs major shareholder, China Netcom, with a 20% stake and effectively owned by the Chinese state. Earlier efforts by Macquarie Bank to acquire a stake in the operator were rejected by the government.

Meanwhile, mainland Chinese operators are said to be interested in acquiring a stake in SmarTone. Local property developer Sun Hung Kai Properties is understood to be looking to offload its 58% stake in SmarTone, which retains licences to offer both 2G and 3G services. China Mobile already has possession of Peoples Telephone Company, which is only licensed to offer 2G, but could be looking to acquire a 3G operating licence.

The adoption of 3G in a mature market such as Hong Kong has been slow. At the end of June 2008, there were 2.383mn 3G subscribers in the sector, accounting for 21.7% of the total mobile market. Growth over the year has been impressive, rising by 49% and largely dominated by Hutchison Telecom. The operator announced it had launched the hotly anticipated iPhone 3G handset, with 40% of customers signing up to its highest value tariff plan in H108. Further takeup of services will be determined not only by the variety of handsets on offer, but similarly on the delivery of content and the ability of operators to provide killer applications to the market. At the end of our forecast period in 2012, we estimate there to be over 8mn 3G subscribers to account for 57% of the total mobile population.