US investment bank Morgan Stanley initiated coverage of Hong Kong-listed China Netcom, the country's second-largest fixed-line phone company, with an ��overweight�� recommendation and an 12-month price target of HK$12.

CSFB also started coverage of China Netcom on Thursday, with a price target of HK$15.60.

The target prices imply an upside of 19 and 55 percent, respectively, from the company's closing price of HK$10.05 Wednesday.

The stock has jumped about 18 percent since its November initial public offering.

Morgan Stanley said it expected China Netcom's recurring earnings to increase by 34.4 percent last year to 6.63 billion yuan (US$800 million), and by 14.4 percent to 7.58 billion yuan this year, driven by broadband growth.

"China Netcom stock should benefit from potential accretive acquisitions from its parent, as well as slightly better-than-expected 2004 earnings," the investment bank said in a research report.

Morgan Stanley expected Netcom to announce acquisition plans around mid-2005.

But the investment bank pointed to Netcom's regional expansion and third-generation mobile network investment as two major risks.

"While many would argue that the acquisition (of a 20 percent stake in Hong Kong's dominant fixed-line phone company PCCW Ltd.) is being made at the parent rather than the listed company, we view them as virtually the same entity from a strategic perspective. We are not convinced that a PCCW investment would be value-creative."

Parent China Netcom Group planned to pay around US$1 billion for 20 percent of PCCW, sources close to the deal said Wednesday, a much higher price than investors had expected.

"The deal will be sealed by the end of next week, if not this week," said one source close to the deal.

Source: Shenzhen Daily-Agencies