Chinese 3G Adoption Imminent: Who Stands to Benefit?

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INTERNATIONAL TRADER: Beijing Expected to Tap Big 3G Winners by Jon Ogden

Highlighted companies: China GrenTech Corp. Ltd. (GRRF)
Summary: After at least two-years of delay, it now appears the Chinese government may be getting ready to license third-generation (3G) mobile-phone services, whose high speeds facilitate video and internet via cell-phone. This should result in a rush of orders for gear makers, boosting earnings and share prices. The three obvious plays: (1) State-backed ZTE (ticker: 0763.Hong Kong) has core networks, while privately owned Comba Telecom Systems Holding (2342.Hong Kong), and China GrenTech (GRRF) sell equipment to boost mobile signals. Analysts expect the government to grant mobile licenses to at least one of China's two major fixed-line operators (China Telecom (0728.Hong Kong) and China Netcom (0906.Hong Kong)) to compete with its current two cellular providers, dominant China Mobile (0941.Hong Kong) and weaker rival China Unicom (0762.Hong Kong). Adding players and upping the standard should increase capital expenditures to build new networks and upgrade existing ones by as much as $76B in the next five years. ZTE stands to beat foreigners in contracting network support due to its active role in developing the TD-SCDMA 3G standard that the Chinese government is anxious to adopt; Daiwa Institute's Joseph Ho expects ZTE sales to soar 92% in 2007. The stock currently trades at 27 P/E, but if it can grab 20% of an estimated ¥80B increase in capex, it would make the stock look cheap at only 8.3x P/E. Comba and China GrenTech are smaller, but they will still be big beneficiaries. Some analysts caution that while revenues will surge with the acceptance of the new standard, operators will bargain aggressively with equipment suppliers, taking away some of their profit margins.
Quick comment: China Techfaith Wireless Communication Technology Ltd. (CNTF) is the #1 mobile design company in China; it recently shifted its focus from GSM to 3G smart phones • Seeking Alpha's weekly Chinese Tech Stock Update has been covering the ongoing 3G adoption saga • ETFs: PowerShares Gldn Dragon Halter USX China (PGJ) has a 23% telecom exposure in the Chinese market