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September 29, 1999
Asian Stk Focus: China Eastcom Fights For
Mobile Mkt Shr
By OWEN BROWN
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SHANGHAI -- Eastern Communications Co. (Q.ECM), or Eastcom, is a
telecommunications minnow struggling to establish market share in China's
highly competitive mobile phone sector.
Yet despite difficulties in marketing its homegrown brand against
high-profile foreign mobile phone makers, some analysts remain sanguine
about the long-term prospects for Eastcom.
In a highly speculative market where a company's performance is not
necessarily measured by earnings or profit forecasts, Eastcom is seen by
analysts as a good prospect, even if it isn't a star performer right now.
For one, Eastcom has been turning in steady profits. The company expects
improved earnings this year, from 222.06 million yuan ($1=CNY8.2800)
net profit recorded in 1998, based on Chinese accounting standards.
Also, company secretary Shen Yuying said Eastcom is looking at
expanding into other markets such as cable television, adding there's
possibly room for a partnership with Netcom, China's third telecom carrier
that will be launched next month.
"There is a possibility that Eastcom and Netcom could cooperate as the
business focus of the two companies don't overlap," he said.
Shen noted, however, that Eastcom may achieve only 80% of its forecast
after-tax profit of CNY330 million in 1999. He pointed out that delays in
restructuring state-run telecom goliath China Telecommunications Corp.
and uncertainty over the expansion of Code Division Multiple Access, or
CDMA, networks are two problems facing Eastcom this year.
Eastcom and its joint-venture partner, Motorola Inc. (MOT) of the U.S.,
are running CDMA technology trials in several smaller cities in China.
Shen of Eastcom said top mainland officials have been "vague" about
whether CDMA, which affects CNY1.5 billion in Eastcom sales, will be
expanded beyond the pilot cities.
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Crackdown On Smuggling Will Help Sales
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ABN AMRO Hoare Govett telecom analyst Joseph Locke said some
developments might improve Eastcom's performance, such as the recent
crackdown on smuggled mobile phones.
Locke said the campaign by China's central government to check that all
telecom equipment is marked with an official seal of approval could help
Eastcom sales. Though he doesn't expect the company to make solid
headway in the near term, saying it isn't a standout just yet, he thinks the
shares are worth a buy.
Eastcom is listed on the Shanghai Stock Exchange, with an allocation of
150 million B shares for foreign investors and 60 million A shares for local
investors.
A further 360 million unlisted shares are held by its state-owned parent,
Zhejiang Eastern Communications Group Co.
Eastcom's B shares have had a rollercoaster ride so far this year, rallying
from a low this year of $0.32 in March and recovering to $1.11 in July,
before edging back to around $0.88 in September.
That path simply mirrors the overall B-share market, which began the year
sluggishly before a mid-year rally. Prices then eased off following
Cross-Strait tensions sparked in June by Taiwan President Lee Teng Hui's
call for state-to-state relations between Taipei and Beijing.
Wednesday, Eastcom's B shares ended at $0.878 on the Shanghai bourse.
"Eastcom is a relatively good performer on the B-share market compared
with other B shares...it is somewhat stable," said Citic Securities analyst
Shen Yufei said, referring to a recent raft of disappointing first half
corporate reports.
Eastcom recently reported net profit of CNY124 million for the first half of
1999, down 23% from CNY162 million in the year-ago period.
The Citic Securities analyst is projecting EPS of 3.58 cents in 1999 for
Eastcom, from 3.18 cents in 1998, and sees its stock price holding around
$0.80.
China Securities analyst Zhang Jinhui is predicting slightly higher EPS of
3.83 cents for Eastcom in 1999. But his forecast is based on the company
bringing some of its investment profits forward to this year. "There is some
uncertainty," he added.
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To Incur Further Losses From CDMA Trials
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Orient Securities analyst Cui Limin said he expects Eastcom's earnings to
be little changed in 1999, or at most, slightly better than last year's.
Official sales of the Eastcom brand mobile phone, EC528, using the Global
System for Mobile Communications or GSM, haven't been released by the
company, but Cui expects sales will be sluggish compared with other
brands such as Motorola's CD928.
"There is little potential for (Eastcom's) share price to rise as there is limited
scope for Eastcom to increase its product line," Cui said.
State-run media this week cited foreign and domestic analysts' predictions
that China's mobile phone industry still has enormous growth potential.
However, ABN AMRO's Locke said he doubts whether Eastcom can
fulfill its aim to grow its main business in line with China's developing
communications industry.
"I don't think these guys are going to grow as fast as the (overall) market,"
he said.
Eastcom forecasts annual revenue from joint ventures to grow to about
CNY20 billion by 2005. Annual revenue from homegrown products is
estimated to rise to about CNY30 billion by 2005, including $1 billion in
exports.
Production of mobile phones is predicted to rise to more than 10 million
units a year, with about 30% earmarked for export, according to
Eastcom's business plan. And capital-expansion plans should bring its total
assets to CNY30 billion, with net assets of CNY10 billion.
If all these targets are fulfilled, Eastcom will become the biggest base for
research, development, and manufacture of mobile telecommunication
devices in China, analysts said.
Yet CDMA trials continue to incur losses amid uncertainty about the
likelihood of gaining government approval to expand beyond the pilot
cities, Orient Securities' Cui said.
CDMA, the standard used in North America, can accommodate twice as
many calls as its rival technology, GSM, over the same expanse of radio
frequency.
GSM is currently the more prevalent standard in China and government
officials have hinted recently that CDMA may remain reserved for military
use.
Eastcom lost CNY9 million last year from investments in the pilot CDMA
projects and this year, Cui said he expects a further CNY28 million in
losses.
Hence, he expects Eastcom's stock price to struggle to gain ground in the
medium term. Cui also noted that Eastcom is constrained by not having its
own intellectual property rights and instead having to rely for the time being
on Western technology until its in-house research and development
improves.
-By Owen Brown; 8610 6532-6652; owen.brown@dowjones.com
Briefing Book for: MOT | Q.ECM |
