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 Investing in China: Chinacosm? (ZT) |
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wazzup
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作者：游客 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
HONG LU, CHIEF executive and co-founder of the American telecom distributor UTStarcom (UTSI), says his decision to do business in China more than a decade ago wasn't greeted with much enthusiasm by friends and family.
"The first time I went to China was in the early 1990s, and everybody thought I was crazy," says Hong, who was born in Taiwan. "Even my own mother told me I was going insane. Today, everybody says I'm a visionary."
Hong's mother had good reason to be wary. In the early 1990s, China was under the dark cloud of Tiananmen Square massacre of 1989, its economic institutions still suffering from years of brutal dictatorship. Taiwanese citizens were especially reluctant to do business in China, which to this day asserts its hegemony over the breakaway colony.
But Hong's intuition that China held vast potential for those who knew how to play the game has indeed proven visionary. UTStarcom has been a star performer in the Chinese telecom market ever since Hong helped to found it in 1991. Its growth in recent years has been stunning. Revenues doubled in 2003 from the previous year to $1.96 billion, while earnings rose to $1.64 a share from 94 cents in 2002.
The good times keep on rolling. The company recently raised guidance for 2004 to $1.95 a share, and it expects to have more than 100 million subscribers in the next two to four years. The Alameda, Calif.-based company, which makes cheap cell phones called "personal access systems" (PAS) that operate only within city limits, has cracked the telecom market in China wide open.
Its success has surprised some market watchers. Mark Madden, co-manager of the Pioneer Emerging Market fund (PEMFX), says he didn't think UTStarcom could stave off the competition as effectively as is has. "I didn't believe that they had technology that was such a barrier to entry to others," says Madden. "They've done much better than I'd imagined they could have."
The Right Guanxi
Despite its success, UTStarcom, which gets the lion's share of its business through contracts with majority state-owned telecom companies China Telecom (CHA) and China Netcom, isn't immune to one of the curses of the Chinese equity markets — extreme volatility. Its 52-week price range of $20.17 to $46.45 illustrates the rollercoaster ride investors in China stocks should expect. Shares were recently trading around the lower end of that range, fetching about $26 a piece.
Volatile stock aside, UTStarcom shows that it is indeed possible to achieve the astronomical gains in China that Western businessmen have been dreaming of for centuries.
Wireless sales have exploded in the Middle Kingdom in recent years. Moody's Investor Service estimates that 80 million Chinese added mobile-phone-service subscriptions in 2003, up from 60 million in 2002. China's Ministry of Information Industry (MII) estimates that 257 million Chinese subscribed to mobile services as of October 2003, a figure roughly equivalent to the entire U.S. population.
That said, considerable obstacles exist in China's red-hot telecom industry. The lack of strong intellectual-property laws and a culture of counterfeiting are a threat to any technology company that does business on the mainland. Just ask Cisco (CSCO), which sued China's largest telecom company, Huawei, in 2003 for patent infringement. (The case was settled out of court; without admitting wrongdoing, Huawei agreed to remove several of its products from the U.S. market). UTStarcom's Hong says cheap imitations of his company's PAS phones have cropped up on the streets of Chinese cities.
"Intellectual property-right protection in China has a long way to go, as it does in every poor country in the world," says Mark Headley, fund manager of the Matthews China fund (MCHFX). "When your citizens are living hand to mouth...chasing around people who've pirated Microsoft (MSFT) is an incredibly low priority."
Foreign telecoms also face the daunting task of doing business with — and often competing against — companies owned by the Chinese government. Beijing is the majority stakeholder of all four big Chinese telecom companies: China Telecom, China Mobile (CHL), China Unicom (CHU) and China Netcom, which is slated for a public listing later this year. The industry is therefore subject to the whims of central planners. Moody's Investor Service said in a March research report that "the State Council...can not only influence each operator's strategy but ultimately shape their fortunes."
Such an incestuous relationship between the central government and the corporate sector should give pause to investors in foreign telecoms operating in China, such as UTStarcom. If a high-ranking official at the MII, which regulates the telecom sector, should happen to decide that UTStarcom doesn't fit within its template for the future of the industry, the result could be disastrous. As the company states in its prospectus, "If the Ministry of Information Industry sets standards with which we are unable to comply or which render our products noncompetitive, our ability to sell products in China may be limited, resulting in substantial harm to our operations."
While such a scenario may seem unlikely, the uncertainty surrounding the rollout of China's third-generation 3G network illustrates that Chinese authorities aren't afraid to make controversial decisions that could substantially harm foreign companies.
International telecoms such as Motorola (MOT), Nokia (NOK) and Qualcomm (QCOM) have spent millions gearing up for an estimated $80 billion 3G network in China, which services the higher-end mobile phones made by Western companies. But on April 26, reports emerged that the MII was considering delaying plans to develop 3G, which was expected to roll out in late 2004. Ministry officials are now apparently questioning whether there will be sufficient demand for the higher-end mobile phones to justify expenses.
Ironically, the delay of 3G is a big plus for UTStarcom, says Joe Noel, a telecom analyst for Pacific Growth Equities. "This is hugely positive for UTStarcom," says Noel. "If 3G licenses are given out, and China Netcom and China Telecom get those licenses, which is pretty much a foregone conclusion, those two carriers will start spending massive amounts of capital building 3G, at the expense of PAS. This removes that threat for now." Still, most experts agree that a 3G rollout will eventually go forward, probably in late 2005. (Noel doesn't own shares of UTStarcom; Pacific Growth doesn't have an investment-banking relationship with the company.)
To hedge its bets, UTStarcom is frantically diversifying outside of China, building inroads into India, Latin America and Africa. So far, however, the bulk of its revenues — 92% in the first quarter of 2004 — derive from China.
For now, UTStarcom's fortunes are tied directly to China's, and if the company is to continue to thrive there, it will have to play by China's rules. Most important, it must cultivate connections in the government and at the state-owned telecoms to ensure that future policy shifts or licensing decisions don't leave it out of the loop. "UTStarcom has to keep the right people happy at China Telecom," says Pioneer's Madden. "There's a risk that one night China Telecom might wake up and say, 'We're going to use another technology.'"
Some fear a bias against Western-based companies may eventually work against UTStarcom and in favor of Chinese telecoms such at Zhongxing Telecom (ZTE), which makes a cheap mobile phone comparable to UTStarcom's PAS.
Such are the rules of business dominated by what the Chinese call guanxi, Mandarin for "powerful connections." As competition stiffens in the coming years in the expanding Chinese economy, maintaining those connections will be more important than ever. Those with the right guanxi will have access to bank funds, government contracts and operating licenses crucial to keeping their business growing. Those whose connections turn sour will have to scramble to find new markets. The odds are, experts say, that the domestic operators such as China Telecom and Shenzhen-listed ZTE will end up on the winning side, while foreign companies like UTStarcom will be shut out.
There's some evidence, in fact, that this may already be happening.
A Bird in the Hand
Much like the automobile sector, intense competition is eroding the margins of the big players in China's overheating telecom industry as supply outstrips demand. Deutsche Bank estimates that annual demand in China for handsets will rise to 100 million units from 80 million by 2006, while supply is expected to double to 200 million. China has roughly 40 mobile-phone companies peddling more than 800 different models.
Margins are consequently eroding at a rapid clip. Ningbo Bird, China's leading maker of cellphones, has seen gross margins fall to 17.2% in 2003 from 28.2% a year ago. Profits have shriveled so dramatically at the Shanghai-listed Ningbo that it's reportedly mulling the desperate move of jumping into the automobile market.
The trend is hitting telecoms across the board. Earnings at China Unicom, the country's second largest cell-phone operator, declined 8.3% in 2003 even as revenues rose 67%, the first year the company's annual income has fallen since its public listing in 2000. China Mobile, the world's largest mobile-phone company by number of users, said on April 21 that monthly user spending fell 7.6% to $11.7 million in the first quarter year-over-year. And UTStarcom was recently downgraded by First Albany to Neutral from Buy because of increasing pressure on its gross margins. (First Albany makes a market in shares of UTStarcom.)
Even telecom behemoth Motorola, the dominant player in China's cell phone market, is seeing its profits eroded by increased competition. In its April 20 earnings release, Motorola said its "ability to increase profitability and market share in its wireless handset business" is uncertain "in light of increased competition in the China handset market."
That could represent a blow to the long-term growth prospects of Motorola. China is its second-largest handset market in the world behind the U.S., representing about 15% of group sales. Add to those declining margins the delay of the 3G network rollout, which could represent a significant blow to its revenue stream, according to Pacific Growth's Noel, and Motorola may soon find its China operations in disarray.
Motorola isn't alone. Nokia and Lucent (LU) have also seen their China telecom operations falter in recent years as domestic companies have gained market share. The recent sacking of four senior executives at Lucent's Chinese unit on charges of bribery illustrates the extent of the graft in the country, as Western businessmen try to compete with their Chinese rivals. Kickbacks are an ingrained part of a culture in which establishing the right guanxi is an essential part of doing business. While Chinese regulators often turn a blind eye to such practices, U.S. companies must abide by U.S. laws.
Understanding China
"I don't think a lot of people understand China," says UTStarcom CEO Hong. "People are afraid of it because it's different."
Clearly, China is different from Western countries in many ways. Its advantage is an enormous pool of cheap laborers, which allows manufacturers to reap tremendous profits, an engine of growth that has tipped the scales of the global economy. Consumer-goods companies such as Wal-Mart Stores (WMT) and Nike (NKE) have made billions capitalizing on China's cheap labor force, and will continue to do so.
The dark side of China is an oppressive totalitarian regime with little regard for individual rights. According to Amnesty International, China executes more people per year than any other nation in the world. The human rights group estimates that 15,000 judicial or extrajudicial executions per year were carried out in China between 1997 and 2001.
As China becomes more integrated into the global economy, its deplorable human rights record and catastrophic environmental policies are coming under fire. The country's leaders, however, have so far resisted taking significant action on either front.
One thing is certain: China, no matter what pitfalls it faces in the near future, is already an economic powerhouse. While it will assuredly go through tumultuous periods of rise and decline, as do all emerging markets, it seems poised for significant long-term economic growth.
But that doesn't mean a bet on Chinese equities will be a winning one, especially in the short-term. "One should not confuse what's happening on the stock market with what's happening in the economy," says Harvard economist Dwight Perkins. "An awful lot of what the [Chinese] stock market does is just pure speculation."
In other words, when it comes to investing in China, investors should exercise caution.
作者：游客 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 Investing in China: Chinacosm? (ZT) -- wazzup - (12983 Byte) 2004-5-03 周一, 21:02 (1009 reads)
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