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September 30, 2002

An Eastern Telecom Bargain?

By Britt Tunick

Also in this article

  • An Eastern Telecom Bargain?

What investor, recent history notwith standing, would pass up the chance to get in on the ground floor of the overseas equivalent of AT&T?

That's the tantalizing pitch from the small army of bankers preparing the upcoming $3 billion initial public offering for China Telecommunications Corp.

"Asian telecom has done very well this year, and this is really a bet on the country," said one source close to the issue. "It's like buying AT&T 80 years ago - you're betting on the growth and industrialization of the country."

Target Price

With the troubles of WorldCom Inc. still looming over the U.S. telecom industry - coupled with the sector's abysmal performance in the last two years - bankers have been spending a great deal of time coming up with just the right pitch for China Telecom's targeted pricing in the coming weeks.

"In other Chinese deals we've definitely played the demographic card, GDP growth and opportunities to capitalize on other business opportunities in China," said another banker with one of the syndicate firms.

As one of the entities that sprang from the Chinese government's recent breakup of the country's state-owned wire-line and long-distance phone service monopoly, China Telecom services 21 of the country's Southern and Western provinces. These include three of the richest.

Though a few other providers also sprang from the breakup, competition remains limited. China Telecom expects to add up to eight million new wire-line customers by year-end, with another seven

million annual additions between 2003 and 2006. It's that growth picture, as well as the company's low debt ratio, that bankers are counting on to rope in investors.

"Asian telecom is one of the few sectors that has done well this year," said the source close to the deal, pointing to gains experienced this year by comparable Asian wire-line providers.

Shares of KDDI, Japan's second largest telecom company, have surged 42 percent on the Tokyo Stock Exchange so far this year. Shares of KT Corp., South Korea's largest phone company and also a former government-owned entity, have inched up 2.1 percent in a terrible market for telecom stocks on the New York Stock Exchange.

U.S. Telecom

Patrick Comack, a telecom analyst with Guzman & Co., said it is not surprising bankers are working to distance the deal from the problems of the U.S. telecom sector. In fact, he said the absence of any near-term local telecom activity, on top of the overwhelmingly poor performance of the sector, may well be enough to spur some interest in the deal.

"U.S. people that would be investing in China Telecom wouldn't be really investing in a telecom play, it's more of a country play," Comack said. "But with that said, not all telecom companies are bad investments and it depends on the price. As long as they have profits and growth potential it's a doable deal."