GURU'S CORNER: Why Zhongxing Telecom is the CDMA leader in China
By Lester J. Gesteland and Alysha Webb in Shanghai
ChinaOnline News
(22 June 2001) In the flurry of news last month regarding China Unicom Group’s awarding of US$1.5 billion in code division multiple access (CDMA) contracts, multinational firms stole the limelight. Rightly so, some might say, since foreign manufacturers and their local joint venture partners won 90 percent of the network-building project.
Making too much of the deals won by these telecom heavy-weights, however, risks neglecting the fact that some very important local players scored contracts as well; most notably, Shenzhen Zhongxing Telecom Co. (ZTE) <0063.SZ>.
A state-owned, A-share-listed company, ZTE was the biggest winner among domestic vendors, garnering a US$120 million contract to build CDMA wireless networks for 1.1 million subscribers in China’s western provinces. Significantly, this contract was larger than that awarded to Shenzen Huawei Group, China’s dominant and most well-known domestic telecom equipment vendor.
CDMA leader
That ZTE won such a large contract from China Unicom is important but not surprising for, as Merrill Lynch analyst Francis Cheung put it, ZTE is "the leader of CDMA in China."
"The company prides itself as the only Chinese manufacturer able to provide end-to-end CDMA solution[s] from base-station[s] to handsets," Cheung said in a report issued last month.
He isn’t the only one to think so, either. Irwin Jacobs, chairman and CEO of U.S.-based Qualcomm Inc.—the original developer of CDMA technology—is apparently convinced as well. Last month his firm granted ZTE the rights to manufacture and sell advanced CDMA network equipment both at home and abroad. ZTE is the first Chinese firm to enter into a commercial license agreement with Qualcomm.
"Last month, Zhongxing got 7 percent of the Unicom CDMA deal, so it is the leading domestic [CDMA] equipment manufacturer. That is the main reason we hold this stock," Douglas Yang of Shanghai-based Heartland Investment Consulting Ltd., told ChinaOnline.
"We think that CDMA provides a unique opportunity for China’s domestic mobile operators." If CDMA takes off in China, local vendors could take market share away from foreign firms, he said. Also, if ZTE succeeds in CDMA, it may get a piece of the action when mobile networks upgrade to third generation technology, Yang added. (China is currently upgrading its wireless networks to incorporate second-generation technology.)
All this hinges on the success of CDMA in China, a dicey proposition given that the vast majority of users in China, and across the globe for that matter, use the competing global system for mobile communications (GSM) technology. True, experts say CDMA technology is superior, but the jury is still out on whether it will win enough subscribers to survive in China.
Either way, ZTE is on track to earn a lot of money, for China Unicom is reportedly going to spend hefty amounts to see that CDMA gets a fighting chance. Last month’s US$1.5 billion in contracts were awarded for phase one of the project—building a network to service 15.15 million subscribers. According to reports, China Unicom is planning to spend another 70 billion yuan (US$8.5 billion) over the next three years to expand the network to 50 million subscribers.
A profitable venture
ZTE first listed on the Shenzhen A-share exchange in November of 1997. Although a listed company, it is still very much a state-owned enterprise (SOE), with more than 69 percent of its shares owned by government-affiliated entities.
China’s SOEs may have a reputation for being inefficient, lumbering, red ink-hemorrhaging behemoths, but Zhongxing does not fit in this category. In June of 2000, it reported a net profit of 124 million yuan (US$15 million) on revenues of 1.54 billion yuan (US$186 million), according to China’s less-stringent accounting methods.
"I think their financial discipline is quite strong," Yang said. "When a company is growing quickly, cash flow is always a problem, but Zhongxing has kept accounts receivable and inventory at acceptable levels."
Manufacturing locally, researching, selling abroad
Originally a manufacturer of switching systems, mobile handsets, power supplies and PCs, the company has expanded into GSM and CDMA network equipment, videoconferencing systems and telecom chips, among other products.
ZTE was among the first companies in China to come up with a 100 percent domestically designed and manufactured telecom chip. The advent of such home-grown technology forced foreign suppliers to drop their chip prices dramatically to compete, resulting in a sharp drop in the cost of telecom equipment and mobile phones in China.
The company invests more than 10 percent of its annual sales volume in research and development, with R&D facilities in Beijing, Shanghai, Nanjing and Silicon Valley.
It sells its products overseas as well as locally, with 30 marketing and service branches in operation outside of China. Most of its exports currently go to developing countries, but the company’s goal is to eventually sell to developed markets as well.
To buy or not to buy
In light of the company’s windfall last month with the China Unicom project, the question on many A-share investors’ minds is: "Is ZTE a good buy?"
"That depends on the price," Guan Ning, a Shanghai-based analyst with Orient Securities, told ChinaOnline, "Right now, its profit margins are shrinking, though the overall profits are growing. When the price dips, then you should buy."
ZTE closed today at 33.70 yuan (US$4.07) per share.
Heartland Investment Consulting’s Yang holds out a glimmer of hope for foreign investors. Zhongxing has no immediate plans to list on the B-share market or in Hong Kong, "but maybe they have an idea to list a subsidiary in the U.S. market," he said. This would be in the far future, however, he added.
zhongxing.com
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