Chinese Tech Stock Weekly Summary (Mar. 30 - Apr. 5, 2009)

The following is excerpted from IRG's weekly stock report:

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Internet

• Google Inc. (GOOG) launched an online music service in China, a long-awaited move by the Internet giant and its record-label partners to make money distributing songs in a market plagued by piracy. The new venture, which officially began service after seven months of testing, will be free to users in China, but won't work elsewhere. It will earn revenue from advertising on pages that let users download or stream licensed music from more than 140 labels, including the world's four biggest: Warner Music Group Corp. (WMG), Vivendi SA's (VIVEF.PK) Universal Music, EMI Group, and Sony BMG Music Entertainment, a joint venture of Sony Corp. (SNE) and Bertelsman AG. Google and its partners hope the service will draw users away from Google's Chinese competitors, especially Baidu (BIDU) which has a dominant share of search revenue in China. Baidu and other Chinese search sites have generated significant traffic through specialized search pages that help users find and download unlicensed music tracks from the Web. Warner Music would be open to using a free, advertising-supported model like the Google one for online music in other markets besides, although Google currently has no plans to extend the service beyond China.

• China's portal of IT-related products and related services Pacific Online Ltd. announced its 2008 net profit of 88.3 million yuan (US$12.7 million), decreasing from 91 million yuan (US$13.1 million) in 2007. Total revenues rose 37% year on year to 324.6 million yuan (US$46.7 million), including 198.1 million yuan (US$28.5 million) from the company's IT portal PConline and 107.6 million yuan (US$15.5 million) from automobile portal PCauto, altogether accounting for 94% of the total. Revenues from the company's younger portals, such as PCgames, PClady and PCkids, increased more than 100%. Gross profit margin maintained at a stable level of 73%. Operating profit hiked 20% from 114.2 million yuan (US$16.4 million) to 137.5 million yuan (US$19.8 million). A final dividend of 64.7 million yuan (US$9.3 million) was proposed, with a payout ratio of 73%. In addition, as of December 31, 2008, the company had a net cash of approximately 623.6 million yuan (US$89.7 million), with no external debts.

Telecommunications

• China Mobile Communications Corp. is seeking a partner for its plan to buy South African mobile phone operator MTN Group Ltd.'s assets in Iran, Syria and Sudan valued around US$2 billion. China Mobile plans to be a junior partner in any transaction partly because its management feels it doesn't have the necessary skills to operate the assets, and can learn from a majority partner. China Mobile had wanted to acquire minority stakes in MTN's units on its own, but was rejected by the South African company.

• Chinese vendor ZTE (ZTCOF.PK) has defied the slump in the handset sector to boost its own shipments by 40 percent in 2008. It sold 45 million units, giving it momentum that could help it realize its goal of becoming one of the top five handset manufacturers by 2011. ZTE has gained some important handset deals with Vodafone (VOD), Hutchison (HTX), T-Mobile and other operators in Italy and Australia and is working to target the lower end segment with higher end features such as touchscreens and Windows Mobile. The Chinese vendor said it planned to make a major smartphone push in the US market in 2009, including possibly partnering with Verizon Wireless (VZ) on a dual-mode CDMA/LTE handset.

• A successful 3G rollout in China could have ramifications worldwide, with local players predicting that the country's homegrown TD-SCDMA technology will be taken up in other markets. Pakistan is a likely candidate for TD-SCDMA rollout, since China Mobile has invested significant sums in that market. China Mobile owns Pakistani operator CMPak and has pledged to invest US$500 million in the business this year alone. There are more than 10 mobile operators in India, not all of which will receive 3G licenses. TD-SCDMA uses TDD, or unpaired, spectrum, making it a cheaper and potentially more available option for rolling out high-speed data services than the sought-after FDD. ZTE has already rolled out a commercial TD-SCDMA network in Ghana, and South Korea's SK Telecom has deployed a trial TD-SCDMA network in Seoul. ZTE is in talks with a Taiwanese group about such a move. TD-SCDMA's chances of success in China and overseas are boosted by the involvement of non-Chinese vendors.

• China Unicom (Hong Kong) Ltd. (CHU) said its 2008 net profit rose 58 percent from a year earlier, mainly lifted by a disposal gain from the sale of its code division multiple access business to China Telecom Corp. (CHA) last year. The company said it plans to boost its capital spending this year to roll out third-generation wireless services. Net profit for the 12 months ended Dec. 31 rose to 33.91 billion yuan (US$4.96 billion). Revenue fell 1.2 percent.

• China Communications Services Corp. said its 2008 net profit rose 12.8 percent on strong revenue growth. The support services provider said its net profit for the 12 months ended Dec. 31 was 1.32 billion yuan (US$193.1 million) but below the average 1.36 billion yuan (US$198.9 million) forecast of 12 analysts surveyed earlier by Thomson Reuters. Revenue rose 37.9%. The company is controlled by China's largest fixed-line operator by subscribers, China Telecommunications Corp., which is also the parent of Hong Kong-listed China Telecom Corp.

Hardware

• The Lenovo Group (LNVGY.PK) plans to build plants in India and Brazil to take advantage of both countries’ favorable tax policies. Brazil would provide Lenovo with a 25 percent tax deduction on locally manufactured PCs, making the cost of localizing operations lower than making PCs in China and shipping them to Brazil. Lenovo normally preserves its cost advantage by assembling locally manufactured PC components in China.

Information Technology

• Domestic import/export volume for IT products fell 30.3 percent year-on-year to US$87.6 billion in the first two months of 2009. IT exports made up 34.5 percent of the nation's total export volume at US$53.55 billion, down 26.1 percent year-on-year, while IT imports accounted for 30.06 percent of domestic import volume at US$34.06 billion, down 36.07 percent year-on-year. The pace of IT import growth was 1.9 percentage points slower than imports in all industries in January; IT exports lagged behind total export growth by 5 percentage points.