IPO Analysis: China Grentech (GRRF)

| About: China Grentech (GRRF)
China GrenTech makes wireless antennas, repeaters, and other parts for the sending and detection of wireless transmissions in the Chinese telecom market. Antennas are old technology (think Marconi), but since nobody quite yet understands the nature of electromagnetic frequency (NYSE:EMF) radiation, we still end up with incremental improvements, and lots of fun science.

There is also constant work on the exploitation of EMFs through clever algorithms (think Qualcomm and CDMA, etc.), and more basic infrastructure work on just getting useful transmission and detection networks built. The research, detection, and exploitation of EMFs is a wide ranging and hugely important field (microwaves, lasers, cell phones, space travel, interaction of light and matter, quantum tunneling, and it just goes on and on...).

Given that big picture background, what is the likely play here? Are they likely to have some unique scientific advance that cements their moat?

No. The play here is that the Chinese government has been sitting on a decision on what next generation wireless telecom technology to certify, and the rollout of that service by the big Chinese wireless companies is pending. All the big global wireless telecom players have been salivating over that for the last couple of years already. So the play here is on that pending buildout, and the tight relationship that China Grentech has to the Chinese Telecom players, as well as the fact that they likely have a pretty good cost structure (because they are Chinese). This is a regulatory play, not a technology play. Given their likely huge regulatory advantage, let's take a look at their prospectus:

Company: They filed their completed prospectus with the SEC on Friday. China Unicom and China Mobile together accounted for 95.1%, 88.8%, and 78.9% of revenue for 2003, 2004, and 2005, respectively. In 2004 they added China Telecom and China Netcom as customers, accounting for 4.9% and 14.8% of revenue for 2004 and 2005. That gives a total revenue share due to the 4 big Chinese telecom companies for the last 3 years of 95.1%, 93.7%, and 93.7%. Like I said, they are a regulatory play.

They site expected ca. 10% growth in the Chinese telecom market (prospectus, page 4) for the next few years, so given their revenue sources they should have a maximum of 10% top line growth, all else being equal. In actuality, they have had Y/Y revenue growth of 57% (RMB 566.5M/RMB 360.8M) and 26%(RMB 716.3M/RMB 566.5M), and absolute growth of ca. 150-200M RMB Y/Y (ca. $22M). So, their growth is already slowing percentage-wise, and absolutely, and unless they gain some new market share or get higher margin products or otherwise somehow change their product and operating mix they are heading for 10% Y/Y growth.

Net income growth Y/Y has been -2% and 24% (RMB 146M/RMB 148M and RMB 181M/RMB 146M). Given that we are usually more distrustful of Chinese numbers, we think they did some window dressing on the most recent numbers to mask an otherwise uncompelling model. Given the regulatory shenanigans in China, and that we find neither a compelling model nor a smoking gun in their prospectus, we are not going to rate them one way or the other. But...

Stock: Chinese! Wireless! They have timed their listing to hopefully exploit that hype, and because of that they may trade for a bit like a Spectacular Story. In fact, GRRF listed at $18, above its initial upper range of $16, and opened around $20. They are sort-of a monopoly play, so we don't want to call them a Dog, but given the capricious nature of Chinese regulatory uncertainty we really have no confidence in predicting how they will do. For that reason, we'll avoid them.

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Tagged: , Wireless Communications, China
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