Profiting From India’s Cell Phone Boom

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The company operates mobile telecommunications networks in Hong Kong, Macao, India, Israel, Thailand, Sri Lanka, Ghana, Vietnam, and Indonesia. Founded in 1985 and headquartered in Hong Kong, Hutchison Telecom is owned by Li Ka-shing’s Hong Kong-based conglomerate Hutchison Whampoa.

Hutchison Telecom portfolio encompasses both highly developed and newly emerging markets. In developed markets like Hong Kong and Israel, Hutchison believes there remains significant growth potential in providing advanced, sophisticated services to technology-conscious subscribers. And emerging markets offer tremendous scope for future growth of even the most basic services.

India is the apple in Hutchison’s eye. The combination of India’s vast population and very low penetration rate creates an enormous growth opportunity for affordable mobile services. Now that India has become the fastest-growing cellular market in the world, Hutchison has been approached by several potential bidders for its 67% stake in Hutchison Essar, India’s fourth-largest wireless telecom. And like any savvy billionaire, Li-Ka-shing also knows that everything has its price. He also has a reputation for exiting his businesses at the top.

Vodafone submitted an offer that valued the Indian subsidiary at $19 billion. The Indian group Essar, which holds a 33% stake in Hutchison Essar, has offered Hutchison about $11 billion for the remaining stake in the company — a bid in the same ballpark as the Vodafone bid. Reliance Communications, India’s second-largest wireless operator, also has thrown its hat into the ring by securing the backing of the world’s biggest private equity groups.

The back of the envelope calculations show that this is an amazing deal for Hutchison Telecom shareholders. Even after a run up of 56% this past year, Hutchison Telecom only has a market cap of $11.5 billion. With Vodafone valuing just the 67% stake of its Indian subsidiary at $12.7 billion, today’s investors in Hutchison Telecom would be getting a mix of mature units in Hong Kong and Israel and high-growth operations in Thailand, Vietnam and Indonesia essentially for free.

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Now these calculations don’t account for debt in Hutchison Telecom. And Hutchison Telecom’s management has not indicated what it would do with the proceeds. Finally, the deal is still far from done. Nevertheless, the current valuations being bandied about for Hutchison Essar are too attractive for us to pass up buying shares in the selling shareholder.

So buy Hutchison Telecommunications International Ltd. (HTX) at market today and place your initial stop at $31.25. For potentially even bigger upside, buy the June $35 call options (HTXFG.X).

PORTFOLIO UPDATE

The Chinese market continues to be gripped by frenzy reminiscent of the Internet in 1999. China Life (LFC), which surged to $55.75 last Wednesday, only to close at $48.07 on Friday, jumped 12% yesterday to close at just under $54.00. Shares more than doubled in their Shanghai debut this morning after a $3.6 billion IPO. China Life’s closing price valued it at $141 billion, making it the world’s third-biggest insurer, trailing only American International Group Inc. at $185 billion and Berkshire Hathaway Inc. at $165 billion. There is no question that China Life is overvalued. It’s trading at 13 times book value against 2.5 times for the global insurance sector and 2.14 for AIG. If China Life were valued like AIG, it would be trading at less than $10 per share. Stick to your stop of $45.75 and you will have locked in gains of close to 50%.

Given the extraordinary volatility in Chinese stocks, we were stopped out of our China ETF (FXI) on Friday. Experienced traders know that such jumps in volatility indicate market tops. The bottom line: Stay focused and stick to your stops. China is not going to disappear any time soon. We can always re-enter the market when things cool down.

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