UPDATE: HSBC Downgrades China Telcos

HSBC downgraded China Unicom CHU, China Telecom CHA and China Mobile Ltd CHL to Underweight based on clear short-term earnings pain and uncertain long-term reform gains.

HSBC analyst Tucker Grinnan states that the analyst's adjusted earnings are broadly in line with the adjusted consensus/company guidance and the key to the Underweight rating is the multiples to pay for the companies with earnings that are declining for the next two or three years.

Grinnan believes the de facto re-rating of the sector by 30 percent in the past month is not justified. Grinnan thinks the move from 11.5x to 15x for the estimated fiscal year 2014 sector PE reflects invstors' views that SoE and tower sharing will generate near-term financial benefits for the China telco operators in terms of lower capex, lower reinvestment risk and higher free cash flow yields.

China Unicom closed at $15.09 Thursday, China Mobile closed at $49.43 and China Telecom closed at $50.82.