Chinese Tech Stock Weekly Summary

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

Internet

• Inspectors for the International Olympic Committee have told Beijing organizers that the Internet must be open for the duration of the 2008 Olympics. The Internet is routinely censored in China, but Beijing is committed by its host city contract to provide the estimated 30,000 media expected for the Olympics the freedom to report as they have at previous Games. There was some criticism that the Internet closed down during events relating to Tibet in previous weeks, but this is not Games time. Blocking the Internet during the Games would reflect very poorly on the host country.

• Baidu.com (BIDU) will penetrate into the wireless search markets of Shanghai and Shenzhen via the worldwide interoperability for microwave access (WiMax). Shanghai will try to become a "wireless city" in the country and has joined forces with Baidu.com to do a research about wireless searching service. Baidu.com will take part in the wireless network establishment and application service R&D promotion in Shanghai. Besides Shanghai and many cities like Shenzhen, Beijing, Dongguan, Changde will be the piloting areas for the "wireless city" plan, and there will be 25 cities all over the country participating in the plan at the end of 2008. Baidu.com will attach more importance to the technology R&D in the future.

• Baidu.com, Inc. has named Ye Peng as its new chief operating officer, effective on April 25, 2008. Before joining Baidu, Ye used to serve Apple (AAPL) China as country general manager. Prior to that, he worked for SatCom AG, and Motorola Mobile Business North Asia. Experts believe that Ye, with his affluent experience in the telecom industry, will be able to help Baidu boost its business on the search market of wireless telecom.

Hardware

• Chinese LCD producer Shanghai Tianma Micro-Electronics Co., Ltd. has completed the construction of its 4.5-generation thin-film technology liquid crystal display production line. The project started 13 months ago in Shanghai Zhangjiang Hi-tech Park, with an estimated first-phase investment of 3.3 billion yuan (US$470.3 million). The production line is planned to produce 30,000 pieces of 730mm x 920mm TFT-LCD glass substrate a month during its initial operation. The product will be applied to displays of less than 10.4 inches in mobile terminals, engineering controlling meters and vehicle navigation equipment.

• Dell (DELL) is accelerating its expansion across China by enlisting new local distributors for its business-orientated products in 1,000 cities. Dell unveiled its PartnerDirect program in Beijing, which could intensify rivalry with domestic market leader Lenovo. But Dell did not give a timeframe for the expansion of its distribution network. Dell aims to add about 1,000 resellers under the programme focused on the country's vast number of small and medium-sized businesses. The initiative comes about six months after Dell started its mainland retail strategy for consumer-orientated personal computers with new partner Gome Electrical Appliance Holdings.

Telecommunications

• China Telecom (CHA) said it was to acquire Beijing Telecom, an arm of its state-owned parent, as the company seeks sources of growth. China Telecom will pay 5.6 billion yuan (US$798.2 million) for Beijing Telecom, which reported a 46.4 percent increase in profits to 470 million yuan (US$67.0 million) last year. The move will boost the bottom line at a time when business is threatened by the switch to mobiles. China Telecom lost subscribers for the first time last year and has 220 million phone users. Voice call revenue, which fell for the first time in 2006, was 7.9 percent lower last year. Average revenue per phone user dropped 10.1 percent. Regulations forbid fixed-line operators, such as China Telecom and the smaller China Netcom (CN), from operating mobile assets. They are allowed to have limited wireless services that piggyback local fixed-line networks.

• ZTE Corp. recently signed a global partnership framework agreement on system devices with Vodafone (VOD). The agreement covers all-range system devices in GSM (global system for mobile communications) and optical transmission. With the agreement, ZTE will customize various system devices for Vodafone with the world’s largest production line. ZTE had earlier signed a global partnership framework agreement on terminal products with Vodafone in February 2007, which made it a global cooperator of Vodafone in GSM terminals. The sales of terminals via the cooperation hit over 8 million sets in 2007, bringing ZTE to the world’s 6 biggest sellers.

• China is pushing forward a development scheme for full-range telecom service, and the scheme is expected to come out in the near future. The Summit of Mobile Communications Industry called on more efforts on technology R&D and industrial construction, so as to advance 3G development in the country. 3G development and licensing depend on two factors: technology maturity and optimization of market competition pattern. Though 3G licenses have not been issued, the country has already kicked off research on 4G. China saw its number of mobile phone users increase rapidly thanks to reduced handset prices and usage charges, with total mobile phone subscribers reaching 565 million by the end of February.

• Complaints from consumers about the lack of variety in the handsets and the poor network quality of the 3G mobile service flooded China Mobile (CHL). The company kicked off the trial of the TD-SCDMA service in Beijing, Shanghai, Guangzhou, Shenzhen, Shenyang, Qinhuangdao, Tianjin and Xiamen. Some 60,000 mobile handsets and 15,000 3G data cards were made available for the soft launch ahead of the Beijing Olympics in August. The new service needed much improvement before it could become commercially viable. This commercial trial only offers the basic service; even some popular 3G applications such as mobile television via video streaming are not available in the trial. Beijing and Shanghai only had 15,000 and 13,000 TD-SCDMA mobile-telephone numbers available, respectively.

• Daiwa recently downgraded its rating on China Netcom from hold to underperform, and cut its target price from HK$24.72 (US$3.17) to HK$19.96 (US$2.56). Daiwa noted that China’s telecom industry restructuring seems to be the only reason to justify buying, but the broker is not sure whether it is the cure for China Netcom’s profit downtrend. China Netcom posted a net income of 12.1 billion yuan (US$1.7 billion) for 2007, down 6.7 percent from the previous year, as deteriorated by the decline in the traditional voice business.

• SK Telecom Co., Ltd. (SKM) announced that it would continue its investment in the Chinese 3G and 4G communications businesses. It believes that the Chinese government's action of far-reaching asset integration in the country's telecom industry will not affect the interest in foreign companies which invest in the local communications companies. There is a widespread estimate about the assets transaction among the local telecom giants. Part of it is that China Telecom will acquire the CDMA unit in China Unicom (CHU) which will integrate its GSM unit into China Netcom. If these transactions become true, SK Telecom's 6.61 percent minority stake in China Unicom may change.

• China Telecom posted a 37 percent drop in its quarterly profit after consumers increasingly turned to mobile phones from fixed-line telephones. China intends to restructure its telecommunications sector and award licenses for 3G mobile services, which will unleash billions of dollars in equipment contracts for suppliers like Nokia (NOK) and Motorola (MOT). The prospects for China Telecom and China Netcom (Hong Kong), which are struggling against a slowdown in traditional fixed-line voice services, hinge heavily on the expected restructuring. A sector reshuffle is expected to grant the fixed-line players a foothold in the high-growth mobile market, although some analysts expect that 3G and the restructuring will be delayed until at least the second half of this year. The company expects revenue from services excluding its traditional phone business to rise to half of overall revenue in two years, up from slightly over a third.

Media, Entertainment and Gaming

• The U.S. professional baseball league will begin streaming games and offering other content on a Chinese-language website it is creating with BroadWeb-Asia in an effort to promote the game in China. The venture reflects the league’s desire to increase baseball’s global appeal to increase international fans. Media companies have found it particularly useful as a way to reach fans that live far away from their traditional teams and therefore would not be served by traditional television. The CBS annual webcast of the “March Madness” college basketball tournament, now in full swing, has millions of viewers and is considered one of the watershed events in proving the internet’s ability to broadcast live sporting events.

Information Technology

• Atos Origin, the worldwide information technology services partner for the Olympic Games, has stepped up business expansion on China. Paris-based Atos Origin is responsible for designing, building and operating the information technology infrastructure for the Olympic Games. Its work in Beijing started in November 2004 and will continue until the event's closing in August. The company integrates, manages and secures the vast information technology systems that relay results and event and athlete information to spectators and media around the world. Atos Origin led nine technology suppliers and partners for the Olympics enabling them to attract large mainland businesses as customers. The majority of Atos Origin's technology services business in Greater China was in financial services, followed by manufacturing, public sector and petrochemicals.

Software

• CDC Software (CHINA) announced that it has completed acquisition of 51 percent shares of Integrated Solutions Limited [ISL]. CDC will establish strategic partnership with cooperation partner through equity injection or shareholding participation in certain specific regions. Besides ISL, CDC has 4 partners of this kind in India, Argentina, Spain and Mexico. ISL has joined the franchising cooperative partnership plan of CDC. The company plans to help ISL develop and expand businesses to other places in China, as well as Middle East, South East Asia, and India.

• Kingdee International Software Group Co., Ltd. reported 766.9 million yuan (US$109.3 million) turnover for the year ended December 31, 2007, up 25 percent year on year. Profit attributable to its shareholders reached 136.5 million yuan (US$19.5 million), compared to 97.4 million yuan (US$13.9 million) one year earlier, an increase of about 40 percent. Software sales contributed 520.2 million yuan (US$74.1 million) to turnover, up more than 110 million yuan (US$15.7 million) year on year. Revenue from software implementation services climbed 28 million yuan (US$4 million) to 153 million yuan (US$21.8 million). And software maintenance, consulting and supporting services combined raised 80.4 million yuan (US$11.5 million) in revenue. Total assets soared from 726.4 million yuan (US$103.5 million) to 962.6 million yuan (US$137.2 million), including 612.8 million yuan (US$87.3 million) equity and 289.8 million yuan (US$41.3 million) liabilities, compared to 475.0 million yuan (US$67.7 million) and 251.4 million yuan (US$35.8 million), respectively, in the previous year.

Semiconductor

• Semiconductor Manufacturing International Corp. (SMI) announced the appointment of Shirley Lin as Chief Strategic Advisor. Ms. Lin has extensive international management experience in direct investment, corporate finance, and mergers and acquisitions. Prior to joining SMIC, Ms. Lin was a partner and managing director at Goldman Sachs & Co (GS).

• Intel (INTC) is rolling out five Atom microprocessors and a collection of chips designed for portable gadgets that access the internet and for other uses as the company tries to create a new market. The low-power, tiny Atom chips will come in speeds of as much as 1.86 gigahertz making it the fastest processor that consumes 3 watts of electricity or less. Global internet growth continues unabated. The best internet experience is still on the PC, but users want to carry that experience with them. That is where the Atom and Centrino Atom come in. The Centrino Atom also includes a single chip with integrated graphics called Intel System Controller Hub that allows for PC-like capabilities and long battery life for devices that fit in a user's pocket. The brains of an electronic device and its system controller hub would help device makers create a range of MIDs with differing functions and designs.

• STMicroelectronics' (STM) shipment of set-top boxes [STBs] in China will reach 98 million units in 2008, according to the company. Shipments hit 72 million units in 2007 with the Chinese market contributing 27 percent of the company's total revenue of US$10 billion in the year.

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

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