The World’s Top Telecom is Chinese

Americans can’t own the stock, but we can still prosper following telecom's “Rule of Three.

In the next few weeks, the US Big 3 Telecoms will release their Q2 results. And it’s a safe bet Deutsche Telekom’s (Germany: DTE, OTC: DTEGY) US unit T-Mobile US (NSDQ: TMUS) will add more new customers than its rivals AT&T Inc (NYSE: T) and Verizon Communications (NYSE: VZ).

All three stocks are well in the black year this year. AT&T leads the way with a 15.2% gain, followed by Verizon at 13.1% and T-Mobile at 12.6%. And there’s more upside ahead.

But none of them can hold a candle to the performance of China’s Big 3 telecom stocks: China Unicom (HK: 762) at 53.3%, China Telecom (HK: 728) up 28.8% and China Mobile (HK: 941) at 22.3%.

Notice that I’ve only listed Hong Kong Stock Exchange symbols for these companies. That’s because the US government forbids Americans owning them, as it does 141 other Chinese companies under the “PRC Military and Human Rights Capital Market Sanctions Act.”

Congress has decided these companies’ practices are adverse to US interests, especially those deemed supporting China’s “military-industrial complex.” Politicians say that Americans owning Chinese stocks helps the Communist Party government raise capital. And they also charge these companies “lack transparency” in financial statements, and therefore pose a danger to US investors.

Consequently, once-popular stocks have been delisted from US stock exchanges. Americans previously owning them have been forcibly cashed out—even wiped out if they weren’t paying attention. And Chinese stocks have been cut from global stock indexes as well.

Bashing China is the rare issue Republicans and Democrats agree on. And it’s hard to pick up a popular US newspaper or magazine these days without reading how China is supposedly declining and suffering as a consequence of its “many transgressions.”

Get ready for more to come. The Biden Administration has imposed tariffs as high as 100 percent on Chinese electric vehicles not even sold here. The Treasury is finalizing a rule that would restrict US investment in anything deemed promoting China’s efforts in “artificial intelligence, computer chips and quantum computing,” a step that would require enormous new bureaucracy and disrupt supply chains.

China’s Big 3 telecoms have few if any operations in the US following China Unicom’s ejection by a 4-0 Federal Communications Commission vote in 2022. But that hasn’t stopped the US Commerce Department “investigating” them for alleged “potential espionage and data theft.”

Nonetheless, for investors, China’s Big 3 Telecoms are world-beaters. And that dominance extends from 2023, when China Mobile was the top sector performer in my Conrad’s Utility Investor coverage universe, returning 34.2%.

Banning Americans owning their stocks, it seems, didn’t do much to restrict these companies’ ability to access low cost equity capital. Not did it slow their pace of innovation and investment.

China Mobile now serves over 500 million 5G wireless customers and 300 million plus Chinese with fiber broadband. And it expects Industrial Internet growth of 16% a year going forward. China Unicom has 274 million 5G users and operates 11,123 virtual 5G industry private networks.

China investment bans have hurt Americans by restricting our investment choices. But that should hardly surprise anyone, given the record of Trump/Biden Administration tariffs against Chinese products like solar panels pushing up costs here, while failing to dent sales there.

Whatever the intent, US government tariffs are taxes paid by American businesses and consumers. And investment bans simply restrict opportunity for those “protected” by them.

Nonetheless, Americans can still learn a powerful rule from the success of China’s Big 3 telecoms: Three’s company, but four’s a mob.

China’s Big 3 model has arguably made the country the best connected in the world, promoting investment from three financially healthy competitors to expand service capabilities and drive down costs.

In contrast, insistence on four or more national competitors by governments in Europe and Canada has left companies focused primarily on cost cutting and debt reduction—rather than innovation and investment.

Deutsche Telekom, for example, is squarely focused on growing its T-Mobile US franchise. That includes buying another 6.7 million shares last month, announcing a joint venture to build fiber broadband and a major acquisition: The wireless operations and 5G spectrum of number four US wireless company TDS (NYSE: TDS).

The US is projected to account for 60 percent of capital spending for 2024/25. That’s more than twice the 28 percent share Germany’s leading telecom intends to spend in its home country.

Until last year’s merger between Rogers Communications (TSX: RCI, NYSE: RCI) and the former Shaw Communications, Canada was trending toward three major national telecoms, BCE Corp (TSX: BCE, NYSE: BCE) and Telus (TSX: T, NYSE: TU) being the other two. That’s when the Trudeau Administration insisted Shaw sell its wireless operations to Francophone champion Quebecor Inc (TSX: QBR/B, OTC: QBCRF).

The idea was to jumpstart a fourth national competitor. And it included strict new network sharing rules to encourage “competition.”

Since then, a price war has hit the country’s telecom stocks hard, triggering a pullback in investment. And as result, Canadians are falling further behind China on network quality, with no real long-term benefit for customer rates.

US regulators approved the 2020 acquisition of the former Sprint—shrinking national telecoms from 4 to 3—mainly because they still envisioned the former DISH Network emerging as a fourth competitor. That hasn’t worked out so well, with that company shedding customers and struggling to remain a “going concern” as part of Echostar Corp (NSDQ: SATS).

Big 3 dominance is also expanding in fiber broadband, where they’re expected to add 4.2 million customers this year including 1 million plus from cable companies. And while Comcast Corp (NSDQ: CMCSA) and Charter Communications (NSDQ: CHTR) are adding wireless users, those are on the Verizon customers network and therefore effectively its customers.

The upshot is the US Big 3 appears to be entering a more prosperous time. The message for investors: When it comes to telecom, follow the Rule of Three.