-China's nascent tech sector heads for choppy waters
By Edwin Chan
SHANGHAI, April 29 (Reuters) - China's handful of high-tech
firms are headed into choppy waters and will see less dramatic
profits this year as foreign giants muscle into their markets
and customers trim equipment spending.
"The prospects are still good, but not as good as last
year. Foreign companies are making more progress in China
markets, so there's increased competition," Joe Zhang, UBS
Warburg's head of China research told Reuters.
China's tech firms are concentrated largely in the telecoms
sector and the tech entities listed on domestic bourses are
mostly hardware manufacturers, ranging from computer makers
like industry leader Legend <0992.HK> to handset makers and the
bigger telecoms switching gear vendors.
Their skirmishes with foreign competitors have already
begun.
Telecoms titans Lucent <LU.N>, Nortel <NT.TO> and Cisco
<CSCO.O> are pushing into China, fleeing a worldwide telecoms
spending slowdown as the U.S. economy sags.
Vastly superior technology and size make them formidable
rivals, squeezing prices and domestic makers' margins.
And spending on network expansions in China, while expected
to remain flat or dip marginally this year, is still a godsend
to these majors who have to cope with a projected 20 percent
pullback globally.
TIMES ARE CHANGING
China's major telecom vendors like Zhongxing Telecom
<0063.SZ> and Datang Telecom and Tech <600198.SS> booked 40 to
60 percent profit growth in 2000, riding a wave of spending
some industry insiders say may hit $40 billion this year.
Analysts aren't so sure.
UBS Warburg's Zhang foresees capital spending dipping five
percent in China this year.
China's telecom operators, reluctant to tap sliding global
stock markets, will see spending power and available cash
drastically reduced, analysts said.
Some expect China Telecom -- the country's largest operator
-- to push back its public offer till next year, while Jitong
Network Communications called off a planned global listing late
last year, citing stock market weakness.
"Infrastructure remains to be built, but where's the money
going to come from?" Zhang said. "Money is not as easy...
Margins are still healthy, but of course not as healthy as last
year."
China's gear makers, already slashing prices to keep their
slice of the market, run the risk of being left in the lurch.
"You have to be prepared, mentally, to do that... otherwise
there's just no business," said Kathy Yu, marketing director at
UT Starcom <UTSI.O>, which focuses on China's network market.
Low-end gear vendor Nanjing Putian posted a 53.77 million
yuan loss in 2000.
Gear makers, which mainly supply switching hardware, see a
bright spot in the much-anticipated rollout of China's first
mobile Code Division Multiple Access (CDMA) network this year.
China Unicom <0762.HK> is expected to splurge 70 billion
yuan on the project over three years, 20 billion of it in 2001
-- a boon to suppliers like Zhongxing, Datang and Huawei
Technologies.
But analysts warn the CDMA field is crowded. Domestic
handset makers, who analysts say will expand their nine percent
share of an enormous GSM market, are also eager to get into the
new but lucrative market.
Gear makers like Zhongxing, Eastern Communications and
Nanjing Putian were forced to delay plans to produce CDMA
equipment and handsets after Beijing suspended plans to launch
the new standard early last year.
Now they are itching to get back in the game.
Nanjing Panda -- a gear maker which also produces handsets
for Sweden's Ericsson <LMEb.ST> -- posted a mind-boggling 1,609
percent surge in profit to 178.46 million yuan, albeit from a
low base of 10.44 million yuan in 1999.
'B' SHARE BENEFITS
Hangzhou-based Eastcom, which makes GSM handsets and base
stations with mobile behemoth Motorola <MOT.N>, posted one of
2000's best performances.
Its net leapt 70 percent, although analysts said that
breakneck pace was largely supported by its long-standing
partnership with the world's second-largest mobile phone maker.
Things may change in 2001.
Shen Jian, Core-Pacific Yamaichi's tech analyst in Shanghai
sees Eastcom's earnings rising up to 10 percent this year after
surging 69 percent in 2000.
Zhang, nonetheless, maintains a "buy" rating on Eastcom,
because it has shares on China's B share markets, the world's
best performing bourses this year, which average PEs around 50.
"My current recommendation is 'reduce', it's not a sell
only because it's a B share," said one analyst at a foreign
bank.
Regulators opened the B share markets to local investors in
February, producing a surge of liquidity and share prices that
many analysts say is not particularly rational. B shares could
keep rising even at PEs of "1000 times," one analyst remarked.
In the long term, though, analysts believe, China's local
firms will close that gap via internal research investment and
ventures with foreign partners.
"Chinese firms, once they grasp the technology involved,
will see huge growth," said Core-Pacific's Shen. "But for two
to three years, domestic producers have no way of competing
with the foreign firms."
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