Lehman Brothers: China 3G Announcement Significant (ALA, ERICY, LU, MOT, NOK, NT, QCOM, SI)

The following are excerpts from Lehman Brothers analyst Tim Luke's note to clients late last week:

Recent reports from Bloomberg ("China to Allow Firms to Choose 3G Standard") highlighted that Chinese Vice Premier Wu Yi, as part of the agreements announced during her official visit to the US, stated that China will make appropriate adjustments to the capital requirements, and also let companies adopt the 3G technology of their choice. While 3G development in China is still predicated on license issuance by the government - the timing of which has been ever elusive - we believe that the announcement is a positive step in opening up the network upgrade opportunity for one of the world's largest cellular markets.

This would also allow the Chinese carriers to avoid deploying significant volumes of TD-SCDMA equipment should they see fit. We believe the TD-SCDMA standard is not as technically mature as either W-CDMA or CDMA2000 and would suffer from lack of scale. The leading vendor proponents of the TDS-CDMA have been Siemens and Datang.

Equipment Vendor Opportunities: We still expect the region to focus some development efforts on its home grown technology (i.e. TD-SCDMA), however practicality would dictate that it utilizes a global standard in order to allow for a globally compliant wireless system. Overall, we believe the initial 3G upgrade (coastal zone and four to five Olympic sites) will cost approximately $3-$5 billion with the total upgrade opportunity in the range of $10-$12 billion. Current international suppliers to the major Chinese carriers include Ericsson (ERICY), Motorola (MOT), Alcatel (ALA), Lucent (LU), Nokia (NOK), Nortel (NT) and Siemens (SI). Visibility into which international vendors win out in the infrastructure upgrade is limited, however we believe that it is safe to assume that a select number of local suppliers, potentially including Huawei and ZTE, will be allocated a share of the opportunity, thereby displacing some of the incumbent international vendors.

QUALCOMM (QCOM): Strategically Beneficial: We believe that another clear beneficiary of the regional 3G build is likely to be QUALCOMM, particularly if carriers choose international standards of W-CDMA and EV-DO Rev. A. There has been some concern as to whether or not QUALCOMM (from a royalty perspective) would benefit as much from the selection of the TD-SCDMA standard, and therefore the selection of an international standard would potentially remove that risk. We note that QUALCOMM also has W-CDMA chip supplier relationships with several local Chinese handset vendors for W-CDMA.