posted by permission of published June 2000 © MSNBC

MSNBC: Bull in a den of bears Asia telecom stocks survive in a field of victims

By Kari Huus

As Japan's recession deepens, its stock market carves a jagged path downward, and its failing banks withhold new loans, few companies are in a position to buck the trend. But there are exceptions, and NTT DoCoMo - a cell phone company that will launch one of the biggest-ever IPOs this month - looks set to be one.

THE OFFER EXPLODES onto a market that has sullenly ground down to 12-year lows and discouraged most new IPOs. But NTT DoCoMo, the fast-growing subsidiary of government-run telecom giant Nippon Telegraph and Telephone, is set to raise 2.13 trillion yen - the equivalent of $18 billion - through the offering. At that size - second only to Toyota on the Tokyo market - it suddenly becomes one of the prime movers of the Nikkei index.

Given the timing, NTT DoCoMo's underwriters priced the offering cautiously - at 3.9 million yen a share - in the middle of what had been the expected range. The total offer comprises 327,000 newly issued shares and 218,000 held by NTT, when it begins trading on Oct. 22.

The initial response hardly suggested a crisis, according to analysts, who said the offer was at least twice oversubscribed. Foreign investors, who are generally fleeing the scene, quickly claimed the 8.5 percent of DoCoMo shares reserved for them.

DoCoMo - taken from the Japanese word dokomo, which means "anywhere" to suggest anywhere, anytime service - is the biggest cellular phone operator in the world, but it is not alone in its success. It is part of a sector that has survived - and sometimes thrived - despite Asia's economic turmoil. "Generally speaking, cellular operators in Asia are cash cows," says Gordon Bennett, director of Hong Kong-based Asia Pacific Research Group (APRG).

Bennett is forecasting that DoCoMo, which already has 20 million subscribers, will register 20 percent growth in the coming year. "If this wasn't telecom, or if it was in Indonesia or Malaysia, I might have some concerns. But the Japanese telecom market-like Korea, Singapore, Hong Kong, China-is a money maker."

Amid slumping economic growth and plummeting stock indices, major telecom players stubbornly resisted, holding their value, and thus outperforming their major local markets by large margins. Singapore Telecom, for instance, has outperformed the Straits Times index by 75.3 percent over the last 12 months. Granted, Singapore stocks have fallen some 33 percent this year alone. Advanced Info Service, a Thai cell phone provider is 90 percent ahead of the SET in Bangkok, and Hong Kong cell phone provider beat the Hang Seng by 69 percent over the past 12 months. Telstra, an Australian company that launched an IPO last year, has done relatively well, even as the Sydney All Ordinaries has fallen 6.5 percent in just the last three weeks.

The trend goes beyond Asia, where notable telecom IPOs have gone forward, despite a poor environment for them. The recent $5.6 billion IPO for Swisscom was subscribed three times, though priced higher than most European shares in the sector. Mobistar, a Belgian cell phone group, in a recent $340 million IPO was also oversubscribed several times. In Poland, the telecom company TPSA is also going ahead with an offering.

To some extent, the trend towards telecommunications, and other utilities is a product of the crisis mentality. "Generally speaking, firms that have some type of local defensive nature, like utilities, are going well, says Paul Saferstein, Japan telecom analyst at Morgan Stanley Dean Witter. "These companies have low earnings volatility relative to conditions - things like water, gas and telephone service."

Naturally, there are exceptions to the trend. China Telecom, listed on the Hong Kong Stock Exchange, has disappointed its original followers - which seems somewhat inevitable since it was so hyped. Rumors that the mainland would inject assets at bargain basement prices turned out to be overblown. The company has tracked the downward spiral of the Hang Seng index.

Telecom companies in the Philippines have slowed ambitious plans for line installation. And Smart Communications of Manila has deferred its planned IPO at least four times. Some of the smaller entrants, like many companies in Asia have suffered for the same reasons: they're highly geared, and have exposed balance sheets.

But the big players are exactly what the climate of the last year demands. "They are relatively impervious," says a Hong Kong analyst who asked not to be named because of a company connection to the DoCoMo deal. "All the big ones have got pretty healthy balance sheets, low or no debt. If you're a fund manager (in the region) the telecom stock is probably about the last thing you'll sell."

The details still matter. And DoCoMo has some unique advantages as it comes on the market. It is expected to record strong growth from Japan's Personal Handyphone System users, who are defecting in large numbers to cellular service. The company already registers a high revenue per person - a number that is expected to climb as the company invests in technology to provide new services.

And, like many other Japanese companies that may brave the market, DoCoMo is tapping into the 1.2 trillion yen in personal savings that has few investment opportunities. The Japanese government is trying to encourage growth of the capital markets, which may come naturally, since most Japanese banks are in no position to make new loans, even to the most credit-worthy firms. "There is a strong credit crunch," says Nobuo Tanaka Minister for Trade Industry and Energy at the Embassy of Japan. "Japanese manufacturers are thinking it's much better to move to the financial market than direct financingá it's much cheaper."

For most institutional investors, who tend to buy with the market index, DoCoMo will be a vital part of their portfolios. And it can't hurt that the second largest shareholder in the company is reportedly Mitsuhei Obuchi, the elder brother of Japan's Prime Minister Keizo Obuchi. The downside, say some analysts, are concerns that the DoCoMo listing, along with the government's planned sale of NTT shares later this year, will flood the market.

But for a change of pace, analysts don't seem to be dwelling on the downside of this listing. "I think the DoCoMo strategy is sound," says Bennett of APRG. "Short of a severe economic collapse, they will succeed."