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Sunday, 04/29/2001 10:26:45 PM

Sunday, April 29, 2001 10:26:45 PM

Post# of 92667

Foreign giants to put squeeze on China techs
Monday, April 30, 2001

REUTERS


China's handful of high-technology 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, said.

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 such as industry leader Legend Holdings to handset makers and the bigger telecoms switching gear vendors.

Their skirmishes with foreign competitors have already begun.

Telecoms titans Lucent and Cisco are pushing into China, fleeing a worldwide telecoms spending slowdown as the United States economy sags.

Vastly superior technology and size make them formidable rivals, squeezing prices and domestic makers' margins.

Spending on network expansions in China, while expected to remain flat or dip marginally this year, is still a godsend to these major players which have to cope with a projected 20 per cent pullback globally.

Times are changing

China's major telecoms vendors such as Zhongxing Telecom and Datang Telecom and Tech booked 40 per cent to 60 per cent profit growth last year, riding a wave of spending some industry insiders say may hit US$40 billion this year.

But analysts are not so sure. UBS Warburg's Mr Zhang foresees capital spending dipping 5 per cent in China this year.

China's telecom operators, reluctant to tap sliding global stock markets, would 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?" Mr 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, which focuses on China's network market.

Low-end gear vendor Nanjing Putian posted a 53.77 million yuan loss last year.

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 is expected to splurge 70 billion yuan on the project over three years, 20 billion of it this year - a boon to suppliers such as Zhongxing, Datang and Huawei Technologies.

But analysts warn the CDMA field is crowded. Domestic handset makers, who analysts say will expand their 9 per cent share of an enormous GSM market, are also eager to get into the new but lucrative market.

Gear makers such as 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 - posted a mind-boggling 1,609 per cent 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, posted one of 2000's best performances. Its net leapt 70 per cent, although analysts said that break-neck 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 per cent this year after surging 69 per cent last year.

Mr 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 Mr Shen. "But for two to three years, domestic producers have no way of competing with the foreign firms."






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