Which U.S. Companies Will Benefit from China's 3G Expansion?

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 |  Includes: ALTR, CHA, CHL, CHU, CTV, ERIC, NOK, PMCS, PWAV, QRVO, SIEGY, SMI, VIEW, XLNX, ZTCOF
by: Richard Davenport

EVENT: ALTR, XLNX Modestly Raising Guidance Due To Strength In China 3G Infrastructure
CAUSE: Large Roll-Out; $56B Over Next 3 Years; One Of Very Few Positive Trends Now In Tech
IMPACT: Positive For Select US-Traded Names; But None Have Significant Exposure
ACTION: Taking Positive Stance On Several Exposed Names: ALU, COGO, ERIC, PWAV, SMI, More

EVENT: ALTR, XLNX MODESTLY RAISE ESTS. Monday after the close, ALTR updated its Q1 (Mar) guidance, now expecting revenues down 15-20% Q/Q vs 15-25% previously. The midpoint ($259.5M) is +2.2% above Street expectations of $253.8M. Tuesday morning, major competitor XLNX announced that it sees FQ4 (Mar) revenues down 13-18% Q/Q vs 15-25% previously. The midpoint ($387.4M) is +5.9% above Street expectations of $365.7M.

CAUSE: 3G WIRELESS INFRASTRUCTURE STRENGTH IN CHINA. In separate press releases, ALTR stated that “the improved outlook is largely attributable to better than expected demand from OEMs providing equipment for Chinese 3G wireless networks,” while XLNX noted more vaguely that the increase was “due primarily to better than expected wireless communications sales.” The main OEMs benefitting are all Chinese—Datang, Huawei, and ZTE (OTCPK:ZTCOF)—with ALU, ERIC, and Nokia (NYSE:NOK) and Siemens (SI) benefitting to a lesser extent.

China Mobile (CHL; China’s largest wireless carrier with ~463.9M subscribers) is slated to add an additional 60K 3G base stations this year on top of the 20K it already has, rolling out its TD-SCDMA technology to 238 cities by year-end. China Unicom (CHU; ~134.2M subs) plans to roll out its WCDMA technology to 280 cities by yearend. China Telecom (CHA; ~28.9M subs) plans to roll out its CDMA2000 network to 100 cities by year-end. Overall, Chinese service providers are expected to spend ~$58B in 3G infrastructure over the next three years, according to China’s Ministry of Industry and Information Technology.

IMPACT/ACTION: TURNING POSITIVE ON SELECT NAMES. We caution that there are no “pure plays” on Chinese 3G infrastructure among US-traded equities, and generally speaking, we cannot quantify any one company’s specific exposure. Additionally, given the small exposure, strength in this area can be offset by weakness in several other areas. While the Street still does not have a handle on the magnitude of the overall weakness in tech (as evidenced by TECD’s weak results and guidance this morning), the Chinese 3G strength can be enough to push certain companies’ guidance above Street expectations, as evidenced by ALTR and XLNX. Finally, we note that since this is a multiyear rollout, we view these companies as beneficiaries of a long-term positive trend. What follows is a list of US-traded equities that could benefit from China’s 3G infrastructure buildout (and thus see upside to Street expectations over the next several Qs):

  • ALU (24.9% of business is wireless): has already won 3G network contracts with CHL and Datang Mobile
  • ALTR: already raised guidance due to Chinese 3G infrastructure strength
  • COGO: ZTE is 15% of revenues; Huawei 3.6%; per 2.13.09 conference call expects to benefit from Chinese 3G rollout
  • CTV: ALU 10% of revenues; NSN 10% of revenues; per 2.26.09 conference call expects to benefit from Chinese 3G rollout
  • ERIC (China tied with India, U.S. as largest country at 7% of revenues): has already won 3G network contracts with CHU
  • PMCS: supplies Datang, Huawei, and ZTE; business with these OEMS up Q/Q in Q4
  • PWAV: 31% of revenues from NSN; 17% from ALU; 3G 42% of revenues; expects China uptick in middle to back half of 2009
  • SMI: 28% of revenues from Chinese companies; strategic partnership with Datang Mobile; expected to be primary supplier of Datang’s TD-SCDMA silicon
  • TQNT: stated on 2.11.09 conference call that it expects to benefit from Chinese 3G rollout, as soon as Q2; “comfortable we’ll have a good impact in Q3 and Q4”
  • XLNX: already raised guidance due to Chinese 3G infrastructure strength