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. Last Updated: 07/27/2016

Unicom IPO a Great Success




HONG KONG -- In a sign that China is again drawing the ardor of foreign investors, the value of shares in the country's second largest telephone company, China Unicom Ltd., rose nearly 9 percent on their first day of trading here Thursday, even as the rest of the Hong Kong market fell.


The stock price of China Unicom rose 8.9 percent, or $2.16, to 16.80 Hong Kong dollars. That followed a 12 percent jump on Wednesday in the company's first day of trading on the New York Stock Exchange, where it was the most heavily traded stock.


China Unicom's performance did not surprise analysts, who had forecast a sparkling debut since the company expanded the size of its offering to nearly $5 billion last week. Indeed, executives close to Unicom seemed disappointed that the first day's gain here did not match that in New York.


Given the dowdy reputation that China Unicom once had, however, the company has made a remarkable transformation. Its stock offering was the largest ever in Asia outside Japan.


Part of the success reflects persistent marketing by Unicom's executives and investment bankers. Even more reflects China's image, which has improved since it signed deals with the United States and Europe to enter the World Trade Organization and won a crucial trade vote in the U.S. House of Representatives.


China Unicom's success augurs well for other state-owned Chinese companies, which hope to enter the stock market later this year. The nation's second largest oil company, the China Petrochemical Corp., plans to sell up to $5 billion in shares. Its prospects have been brightened by a 40 percent rise in the value of the shares of its rival, Petrochina Ltd., which went public in April.


The improved prospects extend to smaller companies. Two Internet startups, Netease and Sohu.com, are planning initial public offerings (IPOs) later this year, after delays in the face of a hostile market.


Still, as in previous periods of euphoria over China stocks, some analysts are urging caution. Investors bought into the first wave of Chinese companies, known as "red chips," in the mid-1990s, only to find out that many were poorly managed and cobbled together with shoddy assets.


Unlike the red chips, China Unicom is in a single line of business, with cellular and paging franchises that have a measurable value.


Furthermore, China's cellular market has more than tripled since 1997 to 43.2 million subscribers. With only 4.2 million customers f and franchises that cover 578 million people f Unicom's horizon is virtually limitless.


However, the company's future hinges on its treatment by the Chinese government. Beijing granted Unicom several assets f including the nation's largest paging company f to dress it up for the stock offering. But it must compete against China Mobile, which was spun off from the state telephone monopoly. China Mobile is much larger and has stronger political ties.


"Right now, people are buying Unicom because it is in favor with the government,'' said Douglas Hansen-Luke, the chief executive of Asia Strategic, an investment research firm. "But that could change. It's a very dangerous reason to buy equities."


In the short term, analysts said, investors will probably profit by owning stock in one of two major Chinese phone companies. Clark said that having taken the first steps toward a more competitive phone market in 1999, the Chinese government was unlikely to shake things up further this year.


But he said Beijing probably would issue the next generation of mobile-phone licenses in 2001. There are several companies lining up. One is China Netcom, a carrier owned by several state ministries and backed by a son of China's president Jiang Zemin. Another is China Telecom, the former parent of China Mobile, which owns the nation's dominant, fixed-line network.


Under the terms of its agreement to enter the WTO, China will allow foreigners to own 49 percent of telecoms firms within four years.


Hansen-Luke said investors in China Unicom could reap a windfall if foreign companies chose to acquire stakes in domestic Chinese operators rather than build their own networks. But Unicom's track record in alliances is dismal: It spent several years and $1.6 billion unraveling a series of partnerships with foreign companies that was later declared illegal.


The more basic question is whether China Unicom f with untested management, uncertain ties in Beijing and an underdog position f can compete in China's rapidly changing market.


"Even an idiot can make money in a managed duopoly," Clark said. "But duopolies don't leave you in much of a position to compete when the market opens."