Buying opportunities

During the 2008-9 financial crisis, some wondered (including me) if the relatively flush Chinese operators would use the downturn as a buying opportunity into overseas telco markets. China Mobile seemed promising, given its (now even higher) cash reserve. CM did make a small move before the crash, when in 2007 it bought into Pakistan’s mobile market.

What’s actually happened in the last decade was, not much.

China Mobile has continued to invest in Pakistan, helping its “Zong” unit become the third-ranked player in the market. This year, roughly $200M of China Mobile’s 2017 capex will support Zong, to expand 3G/4G coverage. That’s less than 1% of CM’s projected capex of 176B RMB for this year, though. Overseas growth simply hasn’t been a priority for CM or its main rivals, given the size and growth rate of the domestic market.

State ownership implications

Chinese government entities retain majority control over each of the big 3 telcos. There’s nothing nefarious about this; it used to be common in most of Europe, and still pops up in a handful of other large countries. But it does clearly color investment priorities.

That’s certainly been the case in China. The government has been aggressive in using its ownership stakes, not just regulations, to manage the sector. China Mobile’s choice to invest in Pakistan in 2007, as opposed to say its neighbor to the east, was part of a larger strategy. That’s now culminated in the China Pakistan Economic Corridor.

Bailing out Oi?

With that, one recent story is interesting.

China Daily reported last week that China Mobile might be buying Oi (once known as Telemar), a Brazilian operator plagued by debt issues and undergoing restructuring.

Assuming it’s true, CM’s primary motivation would be ROI (return on investment). However. The China Development Bank would also be involved, per the story. CDB has been an active overseas lender in the telecom sector for many years (in Africa, for instance). It’s also active in Latin American telecom, partly through a $1B 2009 loan to America Movil. CDB has more of a political role than China’s other banks.

CDB lending is typically tied to some commitment to rely heavily on Chinese technology, and/or Chinese labor. As such, a CM/CDB-led acquisition/bailout of Oi will benefit Chinese tech vendors, all else equal. Ericsson, Nokia, Cisco and others active in Brazil will have to watch this very closely.

The bigger question is, will CM start to spend more of its cash stockpile overseas? It has 5B RMB in debt, true, but in the first six months of 2017 its free cash flow was 53B RMB, over 10 times that. Its cash and cash equivalents balance in June was 406B RMB, around US$61B. That’s plenty of buffer to expand, especially with support from the China Development Bank.