Honkong Telecommunications Report Q1 2007

Hong Kong's telecoms market, and in particular its mobile market, continues to surprise analysts with its resilience. Despite a penetration rate easily in excess of 130%, BMI still projects further growth, as a result of dual-SIM ownership, and more importantly the rise of 3G mobile telephony. BMI's most recent Hong Kong Telecommunications report concludes that in spite of its developed status, Hong Kong still offers investment and growth opportunities, especially in the province's high-speed internet and valueadded mobile services. Our forecasts suggest that fixed-line telephony is in decline, and probably terminal. PCCW may be able to point to some evidence of reducing churn, but we project that growth will slow down so much so that by about 2009, the market will come entirely stagnant. Migration to advanced mobile services and broadband technologies should ensure this. Indeed, the growth in the popularity of high-speed internet access has been seized upon by fixed-line operators across the region, desperate to offset fading revenues from local calls, or even international calls. Hong Kong is no different and PCCW can point to its rising data revenues. The operator's now TV service, which at recent count had well over 600,000 subscribers, has ensured the short-term success of PCCW, and of IPTV in Hong Kong, where one third of all households have access.

The sudden acceleration in Hong Kong's mobile market is difficult to explain. From very slow growth in 2005, the number of mobile subscribers increased by about 10.5% in 2006, with close to 1mn net additions. This is surprising but can be explained by the huge consumer interest in 3G telephony in Hong Kong, similar to levels seen in Japan and Korea. Certainly, an improved availability in 3G handsets has helped hugely. Competition remains intense in Hong Kong, and it is a difficult market to break into. Despite this, the regulator has requested for licensees to deploy a CDMA 2000 mobile network in 2008. Given the recent consolidation of CSL and New World Mobility, this has been something of a surprise. From an investor point of view, China Netcom appears to have cooled its relationship with PCCW. It will not add to its 20% stake this year as originally suggested, and has suggested that it will sell its 50% stake in China Netcom Broadband, a broadband joint venture with PCCW.

BMI's latest Business Environment Rankings still show Hong Kong in seventh place, hampered by the small size of the market. However, if growth in the province's wireless and broadband markets can continue, Hong Kong could move up our rankings, possibly challenging Malaysia and Singapore. The fact that China Netcom has failed in its attempt to increase its shareholding in PCCW is a good sign for the local telecoms business environment, showing that it is free of influence from Beijing after all.