The China Netcom Group Corp (Hong Kong) Ltd reported a forecast-beating rise in first-half net profits yesterday, and said it is paying 12.8 billion yuan (US$1.58 billion) to buy four provincial networks from its state-owned parent company.

China Netcom, the smaller of the country's two big fixed-line carriers, said buying the networks in the provinces of Jilin, Heilongjiang, Shanxi and Inner Mongolia will boost earnings per share by 13.8 percent. Under the terms of the deal, Netcom will assume 23.2 billion yuan (US$2.86 billion) in debt.

The purchase follows similar deals by China's other three telecoms giants and values the new networks at about 9 times the earnings forecast.

By comparison, China Netcom trades at a forecast of 12 times, based on the average earnings estimates by deal advisors Citigroup, Goldman Sachs and China International Capital Corp.

"It will enhance geographical coverage, maintain our growth and improve our economies of scale," China Netcom Executive Chairman Zhang Chunjiang said in a statement.

Earlier yesterday, Netcom posted a 30 percent rise in six month net profits to 6.36 billion yuan (US$785 million), including interconnection fees that are being discontinued, compared with 4.875 billion yuan (US$602 million) previously, thanks to steady subscriber growth.

Excluding those fees, core earnings rose by 28 percent to 4.93 billion yuan (US$609 million) from 3.85 billion yuan (US$475 million) a year earlier.

Analysts had forecast that China Netcom would report interim net profit of 5.5 billion yuan (US$679 million) including the fees, or about 4 billion yuan (US$493 million) without, based on the predictions of two groups of analysts.

The dominant fixed-line phone carrier in northern China said in April it was in preliminary discussions to buy the four networks from its parent, China Network Communications Group. The new regions will add 30.5 million fixed-line subscribers to Netcom's 67.1 million customers as of June 30.

Lehman Brothers had expected the networks to be priced at 10.4 billion yuan (US$1.28 billion) and add about 12 percent to Netcom's profit on a pro-forma basis.

(China Daily September 13, 2005)