China Netcom to apply for US$1.5b IPO in US
(bloomberg.com)
Updated: 2004-07-16 10:48

China Network Communications Group Corp., the nation's second-largest fixed-line phone company, plans to seek permission from U.S. and Hong Kong regulators to sell about US$1.5 billion of shares in an initial public offering.

State-owned China Network, known as China Netcom, may file with the Securities and Exchange Commission this week and sell shares as soon as September, sources said, asking not to be identified. The Beijing-based company is raising funds to upgrade networks to compete with China Telecom Corp., which had about half the nation's total of 263 million phone lines last year.

China Netcom will be the fourth state-owned phone operator selling shares overseas and the three existing publicly traded companies have HK$713 billion (US$91 billion) of shares outstanding, which may limit investors' appetite for the IPO. Government lending curbs to cool China's economy have also damped demand for new stock offerings since April.

``Being a latecomer to the capital market compared with its peers is a negative for the company,'' said Andy Mantel, managing director at Pacific Sun Investment Management Ltd., who doesn't plan to buy the shares.

China Netcom was formed after the government broke up former monopoly China Telecommunications Corp. in 2002. The publicly traded company, to be called China Netcom Group Corp. (Hong Kong) Ltd., aims to raise $1.5 billion to $2 billion, the people said.

China International Capital Corp., Citigroup Inc. and Goldman Sachs Group Inc. are arranging the share sale. Officials at the banks and Zhang Ying, a spokesman for China Netcom, declined to comment.

More Phone Lines

In November 2002, China Telecom raised about US$1.4 billion after reducing the size of its IPO because of insufficient demand. The company, whose shares dropped 20 percent this year, trades at about 8.6 times its estimated earnings per share, according to Bloomberg data.

The company has operations in 10 provinces in the north, and plans to include six of them in the new company: Beijing, Tianjin, Hebei, Liaoning, Shandong and Henan, the people said. The six provinces had a total of 79.5 million fixed-line users as of May, 27 percent of the nation's total, according to the Ministry of Information Industry.

China Netcom's exposure to poorer regions in the north puts it at a disadvantage to China Telecom. People in Liaoning province in the north-east had monthly per-capita income of 700 yuan in May compared with 1,481 yuan in Shanghai, where China Telecom operates, data from China's statistics bureau show.

Discount

``Netcom will probably need to sell at a discount to its bigger rival,'' said Jacky Choi, who helps manage about US$2.2 billion at Value Partners Ltd. in Hong Kong. ``Whether they can raise that much will depend hugely on the market sentiment in September and it's too difficult to predict where the market is heading.''

China, the biggest recipient of foreign investment, increased phone lines by 23 percent last year as the economy expanded at the fastest pace among the world's biggest markets.

The group has more than 220 billion yuan (US$26.6 billion) of fixed assets and provides voice, data and multimedia communication services through its domestic and international fixed telecom networks, according to its Web site. It also offers cordless phone services to compete with China's two mobile- service operators.

Companies in Hong Kong and China sold US$15.4 billion of shares to global investors this year, compared with US$13 billion offered in all of 2003, according to Bloomberg data. Citigroup ranked first underwriting such sales last year, while Goldman is on top this year.

Stock Slump

China Resources Peoples Telephone Co., a Hong Kong wireless company controlled by China's Cabinet, fell 8.2 percent when it started trading in April. Semiconductor Manufacturing International Co. and Tom Online Inc. dropped on their debuts after U.S. technology stocks slumped and China announced steps to curb economic growth.

The most populous country, China overtook the U.S. last year as the world's biggest recipient of foreign direct investment, drawing US$53 billion, according to the Organization for Economic Cooperation and Development. China's economy expanded 9.8 percent in the first quarter from the year earlier period, outpacing growth in the rest of the world's 20 largest economies.

PCCW Stake

China Netcom's holding company said it is in talks to set up ventures and may buy a stake in PCCW Ltd., Hong Kong's biggest fixed-line operator. China Netcom doesn't plan to include PCCW's assets in the publicly traded company before the sale, people familiar with the plan said.

The company also will file with the Hong Kong Stock Exchange, the people said.

Major shareholders include the Shanghai municipal government, the State Administration of Radio, Film & Television, the China Ministry of Railway and the Chinese Academy of Science. Jiang Mianheng, who's vice president of the Academy and son of former Chinese President Jiang Zemin, also served as a director China Netcom's board.

A group of more than 10 investors, including Goldman, News Corp., Bank of China and China Construction Bank, bought about 12 percent of China Netcom Corp., a former unit of China Netcom, in 2000, for US$325 million.

(Courtesy of Bloomberg)

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