Asia: China telecom issue poorly received in US

Global Finance, Jan 2003 by Platt, Gordon

China Telecom slashed the size of its initial public offering by more than half in the face of weak investor demand, but the IPO was still the fifth-largest new issue of 2002. Despite the big reduction, the offering received a poor reception from US investors.

China's biggest fixed-line phone company, China Telecom managed to raise $1.4 billion by selling a 10% stake in the company. It said the net proceeds would be used to expand telecom networks, improve services and develop new technologies.

China Telecom's American depositary receipts, which were listed on the NewYork Stock Exchange, fell 5.4% in their November 14 debut from the $18.98 offering price.The company was prevented from offering the stock for less than it did because of a Chinese government regulation that prohibits state-owned companies from selling stock for less than the value of their net assets per share.

The dual-listed issue fared relatively better in Hong Kong, where it slid 2% below its offer price on its debut. Retail demand was stronger in Hong Kong than in New York, where 95% of the shares were allocated to institutional investors.

Morgan Stanley, Merrill Lynch and China International Capital brought the IPO to market.The Bank of New York was selected as depositary for the ADR program. One ADR represents 100 H shares, which are traded on the Hong Kong Stock Exchange.

China Telecom is the No. 1 provider of fixedline telephone, data and Internet services in four of China's most economically developed regions. It serves the municipality of Shanghai and the provinces of Guangdong, Jiangsu and Zhejiang.

The company was forced to re-jigger its duallisting stock plan after the international portion initially failed to attract sufficient investors. The domestic offering was fully subscribed on the first go around but was also re-launched.

China Telecom announced an eight-fold increase in connection fees for international calls to woo global investors and also offered to increase its dividend. Last year alone China Telecom wired 20 million homes and businesses. But fixed-line revenue is growing only 2% to 3% annually, and the goveminent is pressuring the company to extend coverage to rural areas, where the cost of building networks is higher.

Another fixed-line carrier, China Netcom, is expected to go public in 2003, and additional stock offerings are likely from China Mobile and China Unicom, which operate in the more-lucrative wireless sector.

China Telecom became the first Chinese telecom to start business in the United States when it opened a subsidiary in Washington, DC, on November 4,2002. Zhang Weihua, head of China Telecom (USA), says it aims to create seamless communications links between US companies and their Chinese subsidiaries.