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Business

Belt and Road driver of CITIC deal in Baltic

CFO David Chan, chairman Xin Yue Jiang and Tiger Lin, from left, announced CITIC Telecom’s first-half results on Aug. 16. (Photo by Joyce Ho)

HONG KONG -- The telecom arm of Chinese state-owned investment company CITIC Group said on Tuesday that its acquisition of a European fiber network would help its clients reach cities in the old Soviet bloc as part of China's Belt and Road initiative.

"It's not a massive project, given the size of Eastern Europe's economy," said David Chan, CITIC Telecom International's chief financial officer, who said that the buyout, costing "a few tens of million euros," would probably yield returns "in the teens." "But its impacts are significant," said Chan, adding that the company's core market remains in China.

Through its wholly owned subsidiary CPC, CITIC Telecom announced the deal in April to buy from Amsterdam-based Linx its telecom business which includes a 470km submarine fiber network across the Baltic Sea. The deal adds 13 countries and 24 points of presence spanning the Netherlands, Sweden, Finland, Latvia, Estonia, Hungary, Poland, Ukraine, Lithuania, Kazakhstan, Georgia, Azerbaijan and Russia to CITIC's network coverage.

The transaction also comes with various network operations centers in Moscow and Tallinn, Estonia, and a data hub that is the largest internet exchange in Estonia.

Chan said the deal was prompted by some customers who were looking to expand into Moscow as part of China's Belt and Road initiative but were struggling to find a trusted service provider on the ground. "We have a lot of clients as such that need to venture into places where language barriers are high," said Chan.

CITIC Telecom's business has had to adapt to global changes. "We used to bring foreign investment into China, but now it's the other way round," said Chan. "These places we invested in are the trickiest for Chinese clients going global."

Meanwhile, the company offered on Tuesday to buy the rest of CITIC Telecom Tower it doesn't already own for 850 million Hong Kong dollars ($109.6 million). Half of the transaction would be settled in cash, and the remainder in new shares issued at HK$3 per share to its parent CITIC Group.

The move will allow the company to build a high-tier data center through increasing its available racks to 4,000 from around 800 now. "Only 9% of the currently available space is left," said Tiger Lin, CITIC Telecom's CEO, who expects the new enterprise will yield a 10% return. About one-fifth of the rack space has already secured by strategic partners, while another 20% is in advanced talks with potential partners.

Factoring in the 1.29 billion yuan ($190 million) purchase of a 39% stake in CITIC Network, also settled by an issue of new shares to its parent, CITIC Group's stake in CITIC Telecom will jump to 65% from the current 58%.

For the six months ended in June, the company posted a modest 3.2% growth in net profits to HK$410 million dollars, or 12.1 Hong Kong cents, from a year ago. Its total revenue fell 12.1% on the year because of slowing mobile phone sales, in particular of the iPhone 6S. It also faced falling demand for its fixed-line services as well as international voice and SMS services.

The company's prepaid average revenue per user in the mobile segment slid 31.9% to HK$10.1 during the first-half.

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