China Opening Its Telecom Market: Who Benefits?

Submitted by Sizemore Investment Letter as part of our contributors program

China made news this week by announcing that it would allow censorship-free access to Facebook (FB), Twitter, and many Western news sites in its Shanghai Free-Trade Zone. Though China is still a long way from implementing anything resembling American freedom of speech, the fact that the government is loosening its grip on information at all is noteworthy.

But as interesting as this might be, what really caught my eye were comments that the Chinese government would allow non-Chinese telecom companies to provide internet services. Currently, only China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU) are authorized.

Whenever the words “China” and “opening to foreign firms” are used in the same sentence, investors’ eyes get big. You know the storyline: There are 1.3 billion potential customers in China. If you only get  2% of them, that’s 26 million new customers, or a quarter of Verizon’s (VZ) current customer base.

We should keep things in perspective here. China is not opening its telecom market to foreign competition. At this stage, the liberalization is limited to the Shanghai Free Trade Zone.

Still, it does get you to wondering: If China were to fully liberalize its internet service market, who would stand to benefit?

I wouldn’t put AT&T (T) or Verizon at the top of the list. Neither has much of an international presence outside of a few partnerships with local providers.  These are very much American companies serving a primarily American market.

What about globe-trotter Vodafone (VOD)? Vodafone is the most internationally diversified of the major mobile carriers, and after the Verizon Wireless divesture, they will have the cash on hand to do pretty much anything they want.

However, Vodafone already has a strategic relationship in place with China Mobile; it’s hard to see VOD encroaching on its partner’s turf. Likewise, France’s Orange (ORAN) has a strategic partnership in place with China Telecom.

Spain’s Telefonica (TEF) is one possibility. After Vodafone, it’s the most internationally diversified mobile carrier in the world. Telefonica has experience investing in China. Until last year, the company was a major shareholder in China Unicom — eventually selling its China Unicom stake as part of its efforts to shrink its balance sheet. Unlike many of its competitors, Telefonica also has experience providing fixed-line telephone and internet service in addition to mobile.

Telefonica hasn’t been making any major expansion moves of late, as the company has instead made paying down its debts a priority. This may be changing, however, as just this month Telefonica  struck a deal for control over Telecom Italia (TI).

Will any of this actually pan out? We’ll have to wait and see — at this point, it’s pure speculation. But if any of the major Western telecom companies were to jump into the Chinese market, my bet would be Telefonica.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long CHL and TEF. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”  This article first appeared on InvestorPlace.

This article first appeared on Sizemore Insights as China Opening Its Telecom Market: Who Benefits?