Report on Zi by Groome Capital's Sean Chen on July 16
Zi Corp's: stock jumps 51.9% on news of
China deal
Software
Company Overview
Calgary-based Zi Corporation develops and markets
Chinese character-based language applications and
Internet products and services. It has offices in Canada,
China and the United States.
Development
On Wednesday July 14 th , the company announced that it
had entered into a licencing and royalty agreement with
Xiamen Overseas Chinese Electronic Co., Ltd. (Xoceco).
Xoceco will use Zi Input Software on its GSM (Global
System for Mobile Communication standard) digital
cellular phones sold in China and elsewhere. Further
details of the agreement were not released.
The stock reacted positively to the news. On the TSE, Zi
Corp. was up 51.9% on Thursday, closing at $4.83. On
NASDAQ, trading moved the stock to US$3 3/16. Today,
the stock is up $0.92 intraday on the TSE.
Vast Market Potential
The China GSM cellular phone network had approximately
26 MM subscribers at the end of 1998. According to
industry estimates, it will grow to approximately 40 MM by
the end of 1999, and 50 MM for 2000. In China, the overall
market penetration for cellular phone is approximately 2%,
and 8% for major cities, such as Beijing, Shanghai and
Guangzhou.
The current Chinese network is based on the GSM
standard. In contrast, the North American network is a mix
of GSM and CDMA (Code Division Multiple Access)
standard. As a barter to gain entrance into the World Trade
Organization, the Chinese government has agreed to add
CDMA to its network. By creating a future dual mode
cellular network, the Chinese government is indicating an
interest to provide more investment opportunities for
foreign investors. As big players like Ericsson, Motorola
and Nokia migrate their product lines toward CDMA and
dual mode cellular phones, domestic producers are getting
into the cellular phone manufacturing business.
According to our industry sources in China, there are
approximately 20 domestic manufacturers geared up to
produce GSM phones. The first manufacturer marketed its
first model in October 1998, and Xoceco introduced a
model in January 1999. The unit price for its domestic
model is approximately 1000 Yuan, or about C$160, which
is significantly lower than the average price of comparable
foreign brand models, usually in the range of 30% to 50%
higher.
Currently, consumers are more inclined to purchase
comparable foreign brands than domestic models, as they
are willing to pay more for the perceived value and fashion
sense. According to the most recent Chinese industry
survey, foreign brands account for over 90% of Chinese
cellular handset sales. The major foreign players are
Motorola, Ericsson, Nokia, Philips, Mitsubishi, Samson,
Simmons and Alcatel. The GSM phone margin is
approximately 25% and declining. The transition to CDMA
phones will enhance those margins for the foreign
manufactures. Currently, the domestic manufacturers do
not have the technological skills to produce CDMA phones.
Consequently, they are forced to enter into a declining
margin sector of the market.
Domestic competition is fierce in the market, and with
large and established foreign competitors in the market, it
would be difficult for Xoceco to capture more than 1% of
the market. Zi Corp. already has an agreement with
Ericsson and Xoceco for its Zi Input Software. The next
logical choices would be Nokia and Motorola, although
Motorola is using its own Chinese character software.
Zi Corp.'s software can be used on many other devices,
such as Personal Digital Assistants, TV set-top boxes,
pagers, kiosks, game consoles and computers. With over
1.2 billion people in China, Zi Corp's software has a vast
market to explore and many applications which have not
even been considered. The underlying language
processing architecture could be adapted to support other
languages and the company is actively pursuing this
avenue. We are actively following Zi Corp. for any further
developments.
An investment in ZIC may be particularly suited for
investors with above-average risk tolerance, who are
seeking a potential for capital appreciation and who have
diversified investment portfolios.
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