China Netcom buys up local networks

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China Netcom, the country’s second largest fixed-line operator, has agreed to buy four provincial networks from its state-owned parent for Rmb36bn ($4.5bn).

Netcom said it would pay Rmb12.8bn in cash, and assume debt of Rmb23.2bn. The price, which analysts said was reasonable, values the new assets at nine times 2005 forecast earnings, compared with 12 times at Netcom’s existing operations.

Netcom’s acquisition follows similar moves by other overseas-listed Chinese companies, which often buy assets from state-owned parents at a discount. However, they face similar challenges in finding growth.

Edward Tian, Netcom chief executive, said future drivers were broadband, corporate clients and value-added services.

The latest purchase would boost Netcom’s earnings per share by 13.8 per cent this year, he added, and offer long-term growth as well as economies of scale.

The assets, however, would also lower Netcom’s future profitability as their net profit margin was 10 per cent in the first half of this year compared with 15.3 per cent at Netcom’s current business. Li Fushen, chief financial officer, said the impact on profitability would be minimal, as the new business would account for only one-third of the company.

Netcom, in which Spain’s Telefónica has a 5 per cent stake, said yesterday media magnate Rupert Murdoch had resigned as a non-executive director for personal reasons. He will be replaced by Jose Maria Alvarez-Pallete, chief executive of Telefónica’s wireline unit in Latin America.

Netcom also said its net profit for the first half of this year rose 27.9 per cent to Rmb4.93bn, although sales grew just 6.8 per cent to Rmb32.3bn.

Mr Tian said the results, which beat analysts’ expectations, were down to cost savings and strong growth in higher margin services.

Although user growth at traditional fixed-line service was slow at 3.1 per cent to 67.1m, Netcom said the number of people using a limited wireless service called Xiaolingtong rose 45.4 per cent to 18.1m while broadband subscribers surged 84.6 per cent to 7.7m.

Average revenue per user fell 11.8 per cent and 25.7 per cent respectively at its phone and internet services.

Netcom’s shares in Hong Kong finished 1.9 per cent higher at HK$13.4.

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