Despite the hype surrounding China telecom plays, there are still some hidden gems. One is Hong Kong-based China Netcom Group (CN ) (CN), whose American depositary receipts now trade on the Big Board at 34, says David Riedel of Riedel Research Group, which specializes in foreign stocks. Netcom is the top provider of fixed-line phones in 10 Chinese provinces, but its stock has slumped to 33 since hitting a 52-week high of 40 in mid-May. Nonetheless, growing demand for broadband DSL could energize Netcom's sales and earnings this year and next, says David So of Standard & Poor's (MHP ). He rates the stock, at 33, a "strong buy," with a 12-month price target of 46. Increasingly, customers are switching to broadband from slower dial-up connections, he says. Also, demand from bandwidth-hungry users such as online gamers is expected to grow. "Investors have yet to appreciate the impact of increased broadband demand on Netcom's earnings," says Riedel. He figures it will add 11% to revenues and 18% to operating profits in 2006. S&P's So expects Netcom will earn $4.60 per ADR in 2006 and$5.20 in 2007, based on a yuan/dollar exchange rate of 0.129.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial