China Netcom Group Corp. (Hong Kong) Ltd., controlled by the nation’s second-largest fixed-line operator, cut its debt by 17 percent in the first half, improving its chances of raising $1.5 billion selling shares.

Netcom, which provides fixed-line and Internet services in six cities and provinces in northern China, cut its debt by 11.9 billion yuan ($1.4 billion) in December to 58 billion yuan as of June 30, as it transferred debt to its parent, according to a sale document seen by Bloomberg News.

The reduction may alleviate concerns that the company holds excessive debt as it prepares for an initial public offer as soon as October. Netcom’s plans to spend 70.7 billion yuan in the three years to 2006 on new networks and rising competition from cellular phone operators may deter investors.

``The clean-up of the balance sheet will help allay our fears about high debt,’’ said Louis Wong, who helps manage $25 million he manages at Phillip Asset Management in Hong Kong. ``There are still question marks about how competition develops in the industry and the future capital needs for Netcom to develop a high-speed wireless service.’’

Higher network costs reduced its earnings in 2003. Depreciation and amortization expenses rose 9 percent to 20.5 billion yuan for the year ended December, causing a 2.2 percent decline in operating profit before asset write-offs, the document said.

Internet Growth

China Netcom, 86.4 percent-owned by state-owned China Network Communications Group Corp., is betting growth in the mainland’s high-speed Internet market will lure investors from its bigger rival China Telecom Corp., which posted a decline of revenue per user for its cordless phone and broadband service in the first half.

China Netcom’s share of broadband markets in the cities of Beijing and Tianjin, and the provinces of Hebei, Henan, Shandong and Liaoning rose to 89 percent at the end of December from 86.5 percent a year earlier. Its share of the domestic long distance market dropped to 46 percent as of Dec. 31 from 48 percent a year earlier, while its share of the international long distance market was little changed at 60 percent.

The company’s net debt relative to equity fell to 129 percent as of June from 147 percent in December, narrowing the gap with China Telecom, which had a 94 percent debt-to-equity ratio in June. Hong Kong-based Netcom had 3.1 billion yuan in cash.

Profit

The funds raised in the initial public offer may help cut its debt ratio to as low as 103 percent, as it will boost equity, which was about 43 billion yuan at the end of June.

Netcom made 5.6 billion yuan of profit for the six months ended June, the document shows. That’s 15 percent higher than it expected because the company had assumed the debt transfer and repayment was completed in January rather than during the first half.

The company’s revenue rose 12 percent to 32.5 billion yuan for the six months ended June, reflecting some of the 10.4 billion yuan of connection fees collected before 2001 which will be booked between 2004 and 2011, according to the sale documents. China cancelled the one-time connection fee in 2001.

China Netcom had 69.6 million fixed-line subscribers as of Dec. 31 up from 58.4 million in 2002. It also had 7.4 million customers using its personal handy phone system, up from 1.4 million by end of 2002. The number of broadband subscribers quadrupled to 2.5 million at the end of 2003, from 578,700 users a year earlier, the share sale document shows.

The company needs more users to boost profit, as new line growth has lagged that of cellular competitors such as China Mobile (Hong Kong) Ltd. in the nation’s $50 billion phone market. China’s fixed-line users rose 24 percent to 299 million in July from a year-ago period, compared with a 30 percent increase in cell phone users, according to government statistics.

Competition

Price competition among China’s phone operators eroded profit at China Telecom. The nation’s No. 1 fixed-line operator’s average revenue per user for Little Smart, its cordless phone service which lets users roam within cities, fell to as low as 40 yuan in the first half from 45 yuan in the same period a year earlier.

Average revenue per user for its broadband service also fell in the first half to 108 yuan from 110 yuan, China Telecom said earlier month.

Shares of China Telecom have fallen 22 percent this year. Its net debt-to-equity ratio reached 94 percent on June 30, and analysts expect it to fall to 70 percent by the end of year.

China International Capital Corp., Citigroup Inc. and Goldman Sachs Group Inc. are arranging China Netcom’s share sale.

To contact the reporter on this story:
Cathy Chan in Hong Kong kchan14@bloomberg.net

To contact the editor responsible for this story:
Bill Austin at billaustin@bloomberg.net.
Last Updated: September 15, 2004 03:47 EDT