Chinese Tech Stock Weekly Update

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

Internet

• Baidu.com Inc. (BIDU) announced that it is considering a domestic listing, in a bid to move to its long-term aim to acquire search engine-related companies. The company known as the "Chinese Google" said it has had informal talks with China's stock regulator, but added that such a listing was currently facing some legal obstacles. The problem is that there had not been any specific regulations, which allow the likes of Baidu to list domestically, with Baidu being a wholly foreign capital-invested company. Up to the present, no foreign firm has been allowed to list on China's stock markets. But regulators are considering allowing overseas firms to issue Chinese Depositary Receipts [CDRs], according to a document obtained by Reuters earlier this year. Baidu, which has said it plans to launch a blogging service called Baidu Space, said it had launched a beta version of the product in July.

• Telstra Corp. (TLS), disclosed its acquisition of a 51 percent stake in SouFun.com, a Chinese realestate Internet portal, in a deal valued at US$254 million. The move of Telstra, Australia's biggest telecommunications company, is seen as a bid to counter declining sales at home. The company said its Sensis search engine would manage Beijing-based SouFun. A Telstra official stated that the company is looking to SouFun to bringing in net revenues and earnings before interest, tax, depreciation and amortization estimated at A$52 million (US$39.8 million) and A$18 million (US$13.8 million) next year. SouFun generates revenues by online advertising for real estate and home furnishings. Under the deal, the founder of the SouFun, Vincent Mo, will retain 30.9 percent share, with IDG, a venture capital firm holding 14.7 percent.

• According to technology research firm Ovum, the mainland will become the world's biggest broadband market next year on nationwide demand for faster Internet. The report singled out China Telecom (CHA) and China Netcom (CN) leading the market as the dominant providers of broadband access services in the mainland, with their combined market share of 87 percent of subscribers. Ovum forecast that China's broadband market would grow to 139 million subscribers by 2010. As of June, there were more than 45 million broadband subscribers in the mainland following an average annual growth rate of about 79 per cent since 2003. The growth opportunity for mainland firms is seen as being huge, since the mainland's broadband penetration rate is only 3.4 percent of the population, well behind many countries in Asia-Pacific. The International Data Corp. [IDC] reported that worldwide broadband subscriptions would almost double in five years, expanding from about 205 million last year to about 400 million in 2010. Broadband beat narrowband last year as the primary method online households worldwide used to connect to the Internet, according to IDC.

• China’s online advertising market is predicted to hit 4.3 billion yuan (US$548 million) in 2006, according to Analysys. The research firm indicated the value of China's on-line advertising reached 2 billion yuan (US$251.2 million) in the first six-months of this year. Analysys noted that the portals, sina.com, sohu.com and baidu.com, still lead the online advertising market in the country. Analysys released no details about their respective details.

Media, Entertainment and Gaming

• Shanghai Media Group released a forecast claiming that 60,000 households in its home city will subscribe to its Internet television services by year-end. The state-owned broadcasting company is offering the services in partnership with China Telecom (CHA) and is the country’s only licensed seller of Internet protocol television [IPTV] services. At present, it has 6,000 subscribers in the city. Shanghai Media looks to increasing revenues by using Internet television to tap growing web usage in the mainland and sell pay-per-view programming such as movies from Walt Disney (DIS) and Sony (SNE) . China Telecom is working with Shanghai Media to help boost its broadband Internet subscriptions, which have higher margins than its traditional fixed-line telephone business. China Central Television, the nation's biggest broadcaster and Guangdong Television had received government approval to test IPTV services but still had not been licensed to sell.

• Walt Disney (DIS) Internet announced that it has bought out the stake of at least one promoter of Mobile2Win’s China operations: Contests2win, an online innovative brand advertising company. Mobile2Win’s other investors include Softbank (SFTBF.PK), China Venture Capital and Siemens Mobile Acceleration (SI). Mobile2Win is a pioneer in creating mobile marketing solutions for brands in China and India through games, contests, greeting cards, wallpapers, and ring tones.

Mobile/Wireless

• TCL Communication Technology Holdings, a mainland mobile handset manufacturer, reported a second-quarter profit of HK$6 million (US$771,000), compared with a HK$77 million (US$9.8 million) loss in the first quarter. The company reported a 3 percent decline in its second-quarter sales to HK$1.2 billion (US$154,000) and a 55 percent rise in overseas sales that brought its total unit sales by 13 percent to 5.4 million. The mainland mobile handset manufacturer also predicted its business to break even this year. TCL Communication cut its sales forecast to 13 million units this year from 14 million it made a quarter ago, as it wants to avoid price competition with international brands such as Nokia (NOK) and Motorola (MOT) in the overseas markets. TCL Communication said it will continue to concentrate on the low-end market where Siemens and BenQ are major rivals, and will launch a new range of MP3 handsets to boost profitability. TCL Communication makes phones for foreign telecommunications carriers such as Vodafone (VOD), Orange and T-Mobile. The company also sells its handsets under the Alcatel (ALA) brand it bought in October 2004 in Europe and North America.

• South Korea' SK Telecom (SKM) announced its agreement with the Chinese government to cooperate in developing 3G mobile technologies. Under the deal, the country’s National Development and Reform Commission [NDRC] would help the South Korean company strengthen its foothold in China's fast-growing wireless telephone market. SK Telecom said it would establish a joint research center in China to develop a 3G mobile telecom standard promoted by China called time division-synchronous code division multiple access [TD-SCDMA]. China hopes to launch the TD-SCDMA service before the 2008 Olympics in Beijing and SK Telecom plans to build an experimental TD-SCDMA station in Korea next year. Both sides agreed to build a co-operative model of joint development "for not only TD-SCDMA technology but also beyond 3G technology and 4G.

Semiconductors

• Shares of Semiconductor Manufacturing International Corp. (SMI), China's biggest microchip maker, registered a decline after Taiwan Semiconductor Manufacturing Co. (TSM) announced its move to sue the mainland company. The suit alleges that SMI had broken an agreement on intellectual property even as the mainland-based firm expressed its disappointment over the Taiwan-based company’s decision to file the complaint. In January last year, TSM and SMI entered into a patent cross-license agreement under which each party agreed to license the other party's patent portfolio until December 2010. SMI also agreed to pay TSM an aggregate of US$175 million in installments of US$30 million for each of the first five years and US$25 million in the sixth year. The latest suit, which was filed in the U.S., states that SMI did not comply with that agreement which settled an earlier suit by the Taiwanese chipmaker, which claimed SMI violated patents and trade secrets. According to IC Insights, TSM holds a global market share of about 50 percent while SMI has 7 percent.

Telecommunications

• China Telecom Corp. Ltd. (CHA), the largest fixed-line operator in mainland China, posted a fall in its interim profits as it reports a net income of 14.1 billion yuan (US$1.7 billion), down 4.2 percent from 14.7 billion yuan (US$1.8 billion) in the year ago period. Analysts had predicted a profit around the 14.3 billion yuan (US$1.7 billion) mark. The company ascribed the decline to competition from the mobile sector. The company reported sales going up by 3.5 percent to 86.9 billion yuan (US$10.9 billion), compared with 84 billion (US$10.5 billion) a year ago. China Telecom also warned that it would not provide an interim dividend, due to the company’s needs for sustainable business development, its cash flow position, and the need to maintain flexibility in funding. It said it would review the final dividend proposal at the time of reviewing the full year results. In another development, leading Indian cellular operator Reliance Infocomm and China Telecom announced they have signed a deal to provide the first direct telecom connection between the two Asian countries. Telephone calls between China and India, which have been contentious neighbors in the past, are currently routed through the US and Europe. Reliance Infocomm has some 15.5 million subscribers. With the alliance, it will now route calls through the under-sea cable lines operated by Flag Telecom, a UK-based wholly-owned unit it purchased in 2003.

Hardware

• Haier Electronics Group announced its acquisition of the front-loading washing machine and water heater businesses of its parent Haier Group in a deal valued at HK$900 million (US$115.7 million). The company explained the acquisition as a bid to turn the company into the listed flagship of its goods business. Haier Electronics said it will finance the acquisition partly by issuing one billion new shares and, partly to be funded by offsetting a HK$60 million (US$7.7 million) debt owed by Haier Group to Haier Electronics and Haier Electronics' sale of a loss-making mobile handset business to Haier Group for HK$430 million (US$55.2 million) in June.

Information Technology

• Digital China Holdings Limited, a leading information technology services company, announced its results for the first fiscal quarter ended June 30, 2006, with the group’s profit attributable to equity holders of the parent amounting to some HK$54.8 million (US$7 million). The company said its sales posted a 42.9 percent rise year over year and 8.9 percent sequentially to HK$5.6 million (US$720,000). Digital China reported total turnover of HK$5.6 million (US$720,000) compared to HK$3.9 million (US$501,000) in the first quarter of fiscal year 2005-06. All three business units of the firm have achieved significant growth in turnover, as the Distribution Business (low-end IT product distribution) and the Systems Business (enterprise-level IT systems distribution) have also maintained a forward momentum in gross profit. Furthermore, the Service Business (software and system integration services) has won major contracts from leading industrial customers in the first quarter. Digital China is an information technology services company headquartered in Beijing. Digital China focuses on three major directions: distribution of IT products; software development as well as consultancy and systems Integration and related services.