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EXECUTIVE SUMMARY

Recent regulatory and competitive changes in the Chinese telecommunications industry have led to a great deal of debate among industry analysts about the future of one of the fastest growing and dynamic telecommunications sector in the world. In this report, we analyze the competitive, technology, and regulatory issues currently affecting China’s telecommunications operator space with a view to providing strategic guidance to our clients. Our analysis is based on actual interviews we conducted with regulators, industry analysts, representatives at carriers, and various industry groups.

Key strategic findings of this report are:  

Provincial Branches of the three carriers will engage in price competition in 2008-09

We believe that price competition among provincial branches of the three carriers — China Mobile, China Telecom, and China Unicom — is only a matter of time. China Telecom now offers its CDMA customers with handset subsidies, free voice calls between their fixed and mobile phones and the usual free wireless on-net minutes calling. Although there is no sign of an aggressive price war yet in other provinces, given that China Telecom has ample capacity on its fixed line and CDMA networks and the smallest subscriber base, we expect it has the most incentive to compete for market share gains based on a full scale price restructuring.

We continue to expect 3G licensing in early 2009 with China Telecom launching first

We continue to expect the timing of 3G licenses to be awarded by the government in early 2009. However, we also note that there have been frequent indefinite delays in 3G licensing (and we have been wrong in the past about the exact timing). In our view, both China Telecom and China Unicom should benefit from obtaining CDMA2000 and WCDMA licenses, but we are of the view that the biggest beneficiary will be China Unicom.

TD-SCDMA: we continue to see neutral impact for China Mobile

Investors and suppliers should disabuse themselves of notions that TD-SCDMA will be the albatross that will have an impact on China Mobile’s operation. China Mobile’s management, brand, network, subscriber base, and business models are second-to-none in the world and the other operators in China’s telco space have a VERY long way to go to compete with China Mobile. Moreover, its long-term expansion strategy is based not just on urban consumers but will happen in rural areas of China that are not going to be affected by 3G for some time.

TABLE OF CONTENTS

Price competition is inevitable with China Mobile’s pricing strategy more sophisticated than its competitors so far

We see Unicom as the major beneficiary of the way 3G licensing has been restructured in China

Second Phase TD-SCDMA Bidding to commence in November 2008 with an estimated total capex of RMB 30 billion    

Key to TD-SCDMA success will be supply chain issues, with TD-SCDMA vendor group expecting 100 million subscribers in 2-3 years

TD-SCDMA: Neutral impact in 2009 on China Mobile

Network resource sharing: is there a fight coming between China Mobile, China Unicom, and third parties on leasing?

Network Resource Sharing: Monitoring and implementation will be very challenging   

Network resource sharing a positive for China Unicom

CAPEX Estimates and strategies for China Mobile, China Unicom, and China Telecom

Tables:

Table 1: China Mobile - Earnings, 2008E - 2011E

Table 2: China Telecom - Earnings, 2008E - 2011E

Table 3: China Mobile: Quarterly operational and financial statistics, 3Q07A - 3Q08A

Table 4: China Telecom: Quarterly operational and financial statistics, 1Q07A - 3Q08A

Table 5: China Mobile: Historical and projected income statement, 2006A - 2009E

Table 6: China Mobile: Historical and projected balance sheet, 2006A - 2009E

Table 7: China Mobile: Historical and projected cashflow statement, 2006A - 2009E

Table 8: China Telecom: Historical and projected income statement, 2006A - 2009E

Table 9: China Telecom: Historical and projected balance sheet, 2006A - 2009E

Table 10: China Telecom: Historical and projected cash flow statement, 2006A - 2009E

Table 11: China Mobile: Key assumptions, 2007A - 2017E

Table 12: China Telecom: Key assumptions, 2007A - 2017E

EXCERPT

Network resource sharing: is there a fight coming between China Mobile, China Unicom, and third parties on leasing?

In our interviews, China Mobile made it clear that infrastructure sharing to them means tower, cabling, transmission, backhaul and collocation of the room together with power supplies and facilities. They do not see base station equipment sharing with China Unicom. However, our interviews with China Unicom suggest that In addition to towers, cables, pipelines and fibers, and indoor systems; Unicom would like to install their base stations in China Mobile’s sites.

We think that there will be major network sharing issues between the two carriers. Unicom and China Mobile will have to open up agreements with property owners who might have signed exclusive agreements with China Mobile. Not only will base station leasing be an issue but also leasing of buildings that might have indoor systems installed will likely come up as an issue as owners of properties might have signed exclusive agreements with China Mobile.