China Gearing Up for 3G Warfare

China, the world's biggest nation by population, also harbors the largest number of wireless users in the world. China Mobile (CHL - Analyst Report) remains the incumbent Chinese wireless carrier with a 70% market share, well ahead of the second-place China Unicom (CHU - Analyst Report). However, the recently concluded restructuring of the Chinese telecom industry has intensified domestic competition by allowing an additional market entrant.

As per the restructuring mandate, China Unicom merged with China Netcom (a leading fixed-line service provider) and sold its CDMA wireless business to the largest fixed-line operator, China Telecom (CHA - Analyst Report), for RMB 110 billion (US$16 billion), creating two entities offering wireless and fixed-line services in China.

Following the overhaul of the Chinese telecom industry, the Ministry of Industry and Information Technology of China issued three 3G wireless licenses in early 2009. China Mobile was awarded the license for TD-SCDMA (an indigenously developed 3G standard), while China Unicom and China Telecom received licenses for the widely adopted WCDMA and CDMA2000 3G standards, respectively.

Currently, three operators are aggressively implementing their respective 3G deployment initiatives. China Unicom had targeted the launch of its 3G services in 55 cities (including Beijing and Shanghai) during the first half of 2009, covering 284 cities by the end of the year, with 74% penetration of China’s population.

China Telecom had test-launched 3G services in Shanghai in March 2009 and was supposed to have begun commercial services in April. China Mobile is also conducting trial runs for its homegrown TD-SCDMA based 3G network, with a target of reaching 238 cities in 2009. The company plans to spend RMB 58.8 billion (US$8.6 billion) on 3G network build-outs in 2009 and aims to deploy 60,000 3G base stations during the year.

China Mobile may face challenges of adaptability and performance of TD-SCDMA technology given the faster network speeds offered by the competing technologies of its two rivals. However, the TD-SCDMA based 3G initiative is backed by the Chinese government, which has enforced a number of favorable policies to expedite its development and wider deployment.

Nevertheless, the launch of 3G services is expected to boost data usage and provide all three operators an opportunity to grow their respective subscriber bases. We reiterate our Hold recommendation for CHU and CHA while maintaining Buy rating for CHL.