BEIJING -- China stocks gained Thursday, with the Hang Seng vaulting 2.3% to 16,473. The Shanghai Comp likewise was up, adding 0.6% to 1655.

In New York on Wednesday, wireless names finally got a breather, boosted by a broader market rally on dovish comments from Federal Reserve Chairman Ben Bernanke. The sector has seen weeks of heavy selling following the introduction of strict new regulatory policies. Tom Online ( TOMO) gained 6.8% to $12.82, KongZhong ( KONG) added 1.8% to $6.22 and Hurray ( HRAY) was up 1.1% to $5.45.

Online gaming outfit Netease ( NTES), however, dipped 2.4% to $19.72, possibly on pressure from a ratings downgrade. Susquehanna analyst C. Ming Zhao downgraded the stock from positive to neutral in a note Wednesday, saying its new game Da Tang has shown "lackluster" performance and that it's looking less likely to boost the company's growth.

Meanwhile a report out from Fitch Ratings Beijing office flagged a strong outlook for China's telecom sector, particularly mobile operator China Mobile ( CHL).

China's mobile subscription growth claims a five-year compound annual growth rate of 28%, though growth eased to just under 18% last year. Wireless subscriptions easily outpaced annual GDP growth of around 10% over the same period.

Future growth is likely to be mainly in less developed provinces and rural areas, said analyst Eliza Liu. But there's lots of room to grow, with penetration rates last year at only 30% on the mobile side and 27% for traditional fixed-line phones.

The biggest competitive questions are how 3G licensing could remap the carrier landscape. Among the possible outcomes, Fitch says:
  • The government may give out 3G licenses not just to the two current mobile carriers, but also to at least one of the two fixed-line carriers (China Netcom and China Telecom).
  • It could transfer one of the two mobile carriers' networks to the fixed-line side.
  • Or, it could merge both mobile operators with the fixed-line side, thus creating two fully-diversified telecom firms.
  • Clearly, investors need to factor in an outsized element of uncertainty on the China telecom front.

    Of the two mobile operators GSM carrier China Mobile is the clear leader, both in subscriber rolls and financial strength. It owns about two thirds of the market, with nearly 250 million subscribers at the close of 2005.

    China Mobile will likely see "solid but moderating" growth in the short term, Liu said, noting the carrier's positive free cash flow affords it flexibility to retire debt, increase shareholder returns or embark on more M&A. (An ambitious bid for Luxembourg-based cell phone service provider Millicom collapsed earlier this month.

    Second-ranked China Unicom ( CHU), which operates both a GSM and a largely unsuccessful CDMA network, has suffered from the burdensome maintenance and operating expenses of the latter. Over the past four years, its compounded annual profit growth of 7% has failed to keep up with revenue gains of 25%.

    It ended 2005 with close to 128 million subscribers, but Liu says China Unicom's finances are "much weaker than its larger rival" and that it faces greater uncertainty over 3G licensing. The betting is that after licenses are handed out, in tandem with an expected government-mandated industry restructuring in late 2006/early 2007, China Unicom won't continue to run its GSM network.

    But even assuming competition intensifies after 3G licensing, China Mobile should hold up better given its higher-end customer base and brand name and healthier finances, Liu said. China Mobile is likely to roll out 3G service first in wealthier parts of the country while maintaining 2G service for less affluent areas, which should help keep capital expenditures manageable.