Bottom line: A new management shake-up at China Telecom could hint at a coming period of instability for the company, which could hamper its performance just as it gets set to launch commercial 4G service next year.
I’ve been quite negative on China Unicom (HKEx: 763; NYSE: CHU) for quite a while now, as China’s second largest wireless carrier seems to be constantly undergoing new management reshuffles that have hobbled its performance since its creation 5 years ago through the merger of China’s 2 smallest telcos. But now the nation’s smallest wireless carrier China Telecom (HKEx: 728; NYSE: CHA) is showing signs of similar issues, with word that the company is also undergoing its own management shake-up affecting a growing number of top provincial-level executives.
I’ve previously been relatively bullish on China Telecom, which was one of the most focused and stable of China’s 3 state-run telcos. The company is headed by the relatively capable Wang Xiaochu, who has been in his position for a decade now. By comparison, leading telco China Mobile (HKEx: 941; NYSE: CHL) saw major changes in its top management a couple of years ago, and Unicom’s top ranks underwent big changes when it was created in its current form 5 years ago.
But starting around a year ago, China Telecom became surprisingly quiet and seemed to be losing a bit of its energy. The reason appeared to be a conscious decision to stop promoting its older 2G mobile service completely, and the company even slowed promotions for its newer 3G network. As a result, China Telecom’s mobile subscriber base has actually shrunk this year to 183 million users in October, down 1.6 percent from the end of last year.
Many previously thought the company was deliberately scaling back its marketing in anticipation of receiving a 4G license, which finally came a few months ago. But the latest reports indicate China Telecom may be in a bigger state of flux, with reports of a growing management shake-up in several of its major provincial offices. (Chinese article)
The reports cite an unnamed source saying that China Telecom’s internal shake-up extends beyond earlier reports of shuffles in wealthy Fujian and Shandong provinces, and has now moved to northeastern Jilin province. The source says the movement could just be routine shuffling, which isn’t all that uncommon among big state-run firms. But it could also hint at the kinds of instability that have plagued Unicom for most of the last 5 years.
Investors have been relatively patient with China Telecom this year, and were even quite bullish early in the year when the company appeared to be controlling costs in anticipation of getting a 4G license. China Telecom shares soared nearly 60 percent from a March low through early September. But since then they’ve lost 12 percent of their value as investors locked in profits, and also as some tired of waiting for the company to become more aggressive.
One could interpret this latest management shuffle in a number of ways, including the previously stated one that it’s just business as usual. A second interpretation could be that Wang Xiaochu is making changes in anticipation of an aggressive promotional period next year as his company finally rolls out 4G services. A third interpretation would have China Telecom entering into a period of instability and chaos as Wang ages and the people around him start trying to assert their own individual agendas.
Optimists would probably pick the second interpretation, and until recently I probably would also have sided with that view that China Telecom was simply biding its time before making an aggressive move into 4G. But the timing of this management shake-up looks just slightly worrisome, as it seems strange to make such big changes so close to a major new 4G campaign. Accordingly, I’m increasingly apt to side with the third interpretation, and fear China Telecom could be heading into a period of instability that could drag down its performance and potentially end with Wang’s departure.