Chinese Tech Stock Weekly Summary

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

Internet

• Access to Google Inc.'s (GOOG) YouTube inside China was cut off after the Web site was flooded with graphic images from Tibet, including videos of burning trucks and monks being dragged through the streets by Chinese soldiers. Blocking Western Web sites is routine in China, where the government has tightly controlled the flow of information. But the new YouTube blackout is the latest in a string of clashes between the site and foreign governments in Asia and the Middle East that's forcing the company to grapple with the consequences of its increasingly global reach. The Council denied any knowledge of the blockage and promised to investigate. YouTube remained inaccessible from China except to users who took extra technical steps to circumvent the ban. The site has been blocked in China several times before. YouTube's community guidelines state the site encourages free speech and defends everyone's right to express unpopular points of view. But the site also reserves the right to remove content it deems inappropriate, which gives it significant discretion when it comes to politically sensitive content.

Mobile/Wireless

• China Central Television [CCTV] program forced Focus Media (FMCN) to stop sending mobile spam advertisements after a CCTV program named it as a major source of spam. The company’s shares dropped more than 25 percent after the program. A subsidiary responsible for mobile advertisements had set up a toll free number for people to report spam following allegations made in the report. It had also established an internal policy to ban sending mobile messages without a telephone user's permission. The database it used for advertising had been based on information received during the normal course of business.

Technology

• Fujian's Super Computing Center will be built and accessible before June 18, 2008. Its computing capability will reach 10,000 billion operations and the company leads the country in super computing technology. As a platform for high quality computing services, the center will improve the quality of education, and science and technology innovation in Fujian Province. In addition, it will promote the development of the new, advanced technology industry and upgrade traditional industries.

Telecommunications

• China Unicom (CHU) said it is too early for it to overhaul its operations in anticipation of a restructuring of China’s telecommunications sector. The company is tipped to be one of the parties most affected by the restructuring. Rumors have indicated that Unicom's GSM mobile network could be merged with China Netcom Group Corp. (CN), while its smaller CDMA mobile business could be sold to China Telecom Corp. (CHA). China Unicom has denied rumors that the company had stopped marketing activities for its CDMA business before a possible sale of assets to China Telecom. Unicom plans 30.95 billion yuan (US$4.4 billion) in capital spending this year, up 20 percent from 25.72 billion yuan (US$3.7 billion) last year. Of this, 73 percent would be spent on expanding its GSM network. Net profit for the year to December reached 9.29 billion yuan (US$1.3 billion), up from 3.8 billion yuan (US$542 million) in 2006. Revenue increased 4.4 percent to 99.54 billion yuan (US$14.2 billion), up from 95.34 billion yuan (US$13.6 billion) a year earlier. The company expects average revenue per user [ARPU] of its GSM and CDMA services to fall again this year. ARPU would continue to decline because of China's adoption of the “calling-party-pays” system and because its newest customers are mostly less affluent people living in rural areas. ARPU for the GSM cellular business decreased to 46.00 yuan (US$6.60) per month in 2007 from 49.2 in 2006. For CDMA it dropped to 58.1 yuan (US$8.3) from 65.8. The company has yet to receive any notice from the government about a timetable for restructuring of the telecom industry. Unicom is expected to disappear in the restructuring, with its two cellphone systems being absorbed by China's fixed-line phone operators.

Hardware

• Beijing’s plan to introduce unified manufacturing standards should stop the current flood of low quality batteries into the market. The quality of cellular batteries on the mainland has been under the spotlight since a man was killed last year when his telephone exploded. The government's plan to unify standards should help better regulate the market following rising public concerns about quality. The government estimates 30 percent of the telephone battery market is held by illegal manufacturers, which sell products that have a greater chance of exploding. After the accident, the mid-priced to high-end batteries sold well as telephone users no longer were willing to pay less for poor quality products.

• Scud Group acquired 100 percent of Shenzhen-based Chaolitong for about 245 million yuan (US$34.9 million) in December. The acquisition paved the way for the company to explore the rural market. Chaolitong was the company’s major rival in rural areas. Chaolitong, which sells low end batteries, had a gross margin of about 20 percent while Scud's mid-priced to high-end ones, had a margin of about 30 percent. The company could have taken two to three years to surpass Chaolitong in the rural market if they had not acquired it.

Semiconductor

• Semiconductor Manufacturing International Corporation (SMI) has revived plans to sell a strategic stake to outside investors. The Shanghai-based company hired Morgan Stanley and Deutsche Bank to help sell a 20 percent stake for an expected US$500 million. Even though it attracted avid interest from private equity firms, the process stalled by August last year because SMI’s board was undecided about how to proceed. The company has been hammered in past years by continued low prices for the commoditized dynamic random access memory, or Dram, chips, which have pushed chipmakers to expand into more sophisticated products. SMI posted losses in both 2005 and 2006 because of low Dram prices combined with high depreciation costs.

Disclaimer: IRG is not responsible for the accuracy of the news compiled within this article, which is based on publicly available information.