Rural growth make China, India top picks

By Khettiya Jittapong

SEOUL (Reuters) - Phone companies in China and India remain favorite picks for investors in Asia, as operators in the world's biggest and fastest growing mobile markets push out from the cities to rural areas in search of new customers.

Among Asian analysts' top picks are Chinese wireless market leader China Mobile (0941.HK: Quote, Profile, Research, Stock Buzz), and India's top two Bharti Airtel (BRTI.BO: Quote, Profile, Research, Stock Buzz) and Reliance Communications (RLCM.BO: Quote, Profile, Research, Stock Buzz).

"China is still one of the fastest-growing markets, where there is much more room to grow and the competition is not very intense," said DBS Vickers Securities telecoms analyst Chirasit Vuttigrai.

UBS's Jinjin Wang, in a recent research note, called China Mobile "the best play on the China consumption story" and "the best rural growth proxy". Wang rates China Mobile a "buy" with target price of HK$108 ($13.8) -- an upside of around 48 percent.

"Economic growth in China should lead to increasing affordability of mobile services, strong price elasticity and stable ARPU," said Wang, referring to average revenue per user, a key industry measure.

"In our view, the share price should capture not only upside in disposable income levels, but also a structural change in household expenditure towards telecoms."

China Mobile, the world's largest wireless carrier, is expected to report an 18.5 percent rise in 2007 net profit to 78 billion yuan ($10.2 billion), according to 24 analysts polled by Reuters Estimates.

In the last 12 months, China Mobile shares jumped more than two-thirds to trade at HK$73.30 on Tuesday. The stock trades at 18 times 2007 earnings, versus a sector average of 28 times.

Click on ID:nT276344 for details of share performance and ID:nT271887 for details of Asian mobile penetration rates.

HUGE DEMAND

Around 35 people in every 100 have a cell phone in China, compared with only 15 in India, the world's fastest growing mobile market with more than 166 million mobile phone users.

Analysts say it will be late 2008 or early 2009 before the Chinese and Indian markets are fully open to competition that could eat into revenues and margins.

Meanwhile, India's top mobile firm Bharti and second-ranked Reliance are expected to post earnings growth of more than 40 percent for the financial year ended March 2008.

Despite the arrival of Vodafone Group (VOD.L: Quote, Profile, Research, Stock Buzz), which will cut its 10 percent stake in Bharti to 4.4 percent as part of a deal to buy a controlling stake in fourth-ranked Hutchison Essar, companies like Bharti and Reliance will continue to grow.

"There will be a fight for market share, but the overall growth is so huge that everybody will be able to grow quite handsomely," said Sumit Modi, a telecoms sector analyst with Mumbai-based brokerage Emkay Share & Stock Brokers Ltd.  Continued...