Today we turn our eye toward China Netcom
Looking at the first-half profits, it seems like the plan is going all right. Revenue was up almost 7% despite declines in revenue from long distance and local phone services. Profitability improved, and both EBITDA and net income grew faster than revenue (nearly 11% and 28% respectively).
Whereas China Telecom serves the southern part of China, Netcom is focused in the North -- though also predominantly along the coast. Unlike Telecom, though, Netcom is looking to broadband, not 3G mobile phone service, as its primary future growth driver.
Yes, I know, we've all heard this before -- the old "yes, we're a boring old-technology company, but broadband will make everything better." We heard it from analysts and investors in the likes of SBC
In the case of Netcom, though, it seems to actually be working. Broadband subscriber growth was nearly 85% in the first half (about 7.7 million total subs), and revenue was up 54% -- almost fully compensating for revenue lost in the long distance and local businesses. What's more, that's all with a penetration rate of less than 12% in its targeted provinces.
In an effort to grow the business (traditional and broadband), Netcom will be buying four provincial networks from its state-owned parent for about $1.6 billion (and the assumption of about $3 billion in debt). This acquisition will grow the customer base by nearly 50%, and the company believes it will boost earnings by about 14%. Looking longer-term, though, these territories have about 9% of the country's population and an above-average per-capita GDP, so it could also be a fertile market for continued broadband growth.
It seems like there's something for everyone in Chinese telephony. You have the established dividend-paying grower China Mobile, the turnaround candidate China Unicom, the business restructuring candidate China Telecom, and the potential Internet play with Netcom. I think I still like China Mobile the best, but Netcom is certainly worth a look -- especially for those who see the growth of companies such as NetEase.com or Sina continuing.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).