“Wish I” Chinese Telecom Stock

By Travis Johnson, Stock Gumshoe, June 29, 2007

This stock has already been uncovered over at the Gumshoe forum by reader asx, but I thought I’d cover it here since only about half of my readers have checked out the forum … and I was doing the other two companies from the special “Three Top Wish-I Picks for 2007” from Bottarelli Small Cap Research, so it seemed silly to stop there.

So here’s what they say about this third company:

“Mark’s third ‘Wish I’ stock is a $14.98 telecommunications company that’s experiencing exploding growth in China. Based out of Hong Kong (but traded here on U.S. exchanges), this company offers cellular, international, and domestic long distance, data, and Internet services to 131.55 million subscribers in China… and they’re exponentially growing by the day.”

Their price target — for one year out — is $70.

So … what do we have here?

Well, as you know if you’ve been following the forum postings religiously, this company is …

China Unicom (CHU)

They’re one of two big mobile operators in China, and unfortunately they’re the one that’s having trouble growing their subscriber base. China Mobile has been doing much better over the last couple years (and I owned it a couple years back, selling it has been one of many, many mistakes I’ve personally made in investing).

They are growing earnings, about 30% at their last release, I think, but they’re losing subscribers, so there may be some bad news on the horizon at some point … though there are so many potential customers that perhaps that worry is misplaced. The shares have moved up a bit since this ad started circulating sometime in the last few months, it will now cost you about $17 instead of $14, which means that it alone of the three “Wish I” picks has been a short term success.

I don’t have a lot of particular expertise in this area, but CHU is definitely the poor, neglected half of the Chinese wireless duopoly — and perhaps the fact that they generally appeal to the more price-sensitive part of the market means that they’ll do well in the future as the slower adopters in the hinterlands get wireless phones … I don’t know, but that’s certainly part of the argument for buying these shares.

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The other part, of course, is the huge transition to 3G mobile services throughout China over the coming years, with a real focus (as in almost everything Chinese) on the 2008 Olympics as a target for rolling out more advanced technologies and services to mobile subscribers. This is a big company, with a nice duopoly position, but it doesn’t look cheap enough to interest me at the moment (though I probably hold shares through some of my closed end China funds). If it goes to $70 in a year it’ll certainly make you rich from here, but that kind of short term 400% return looks like a pretty wild stretch to me. I’d love to hear if you feel differently.

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I looked into this company via my Scottrade account and saw that the Standard and Poor’s recommendation is to sell. In a nutshell they said it has high risk- “While China Unicom is a leading company in its market, with a history of profitability, we assess the risk as high due to operations involving high fixed costs and large ongoing capital expenditure
requirements, a lack of geographic
diversification, and increased competition.”

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While I am chewing on CHU, and whether it is worth the risk of buying an individual China stock rather than FXI or an index, consider the following Telecom plays: AT&T and Apple! I bought the new IPHONE and it is simply amazing. Ideas on other stocks in this space or that will benefit from IPHONE? Meanwhile, RIMM is rocking up, up and away!

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Gravity Switch

Wrong that Tata was the pick? Or wrong to be cautious? I don’t think I said it couldn’t double, but did want to note that a double was also promised when it was at $15 … lots more fans of the stock now, though at these prices I can’t help but still being trepidatious — should have jumped on it at $4, of course, but my rearview mirror always works better than my windshield.

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