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China's Telecom Overhaul


Cashing in on the country's next-gen network.

We had a huge piece of this news this weekend concerning the Chinese telecommunications market. Here are two links that give a good overview with the multitude of companies potentially affected: China Orders 6 Telecoms to Merge Their Assets and China To Get 3G - At Last!

The long and short of all this is that the Chinese telecom market will undergo a major restructuring and overhaul.

While this will shake up the existing Chinese incumbents (China Telecom (CHA), China Mobile (CHL) and China Unicom (CHU)), the focus of this piece is on what I believe will be a potentially massive infusion into the underlying infrastructure of the fixed line and wireless networks – the 3G investment alone is estimated to as much as $75 billion.

This announcement has been in the works for some time and has contributed to a high level of underinvestment of underlying infrastructure in the region.

Now the benefits will be dispersed, most likely to a broad list of companies. Various sources have mentioned the Chinese incumbents – privately held Huawei and Hong Kong-listed ZTE as likely to get a large piece of this business. I would agree with this assessment, but these two do a lot of business with U.S.-listed component suppliers such as Finisar (FNSR) and Optium (OPTM). A few other fiber optic component suppliers have also listed Huawei as a top-10 customer on quarterly calls for the last couple years.

The more familiar names mentioned as having great potential to win significant business for telecom equipment contracts are LM Ericsson (ERIC), Alcatel-Lucent (ALU) and the Nokia (NOK)/Siemens (SI) networks partnership. Again we are talking contracts worth billions over a number of years. With regard to the aforementioned names, my take is that ERIC is in a formidable position to garner the lead among non-China based telecom integrators.

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A more immediate benefit may be seen by companies in the 3G food chain and I'm looking at a recent move in Qualcomm (QCOM), which is now making a lot more sense. Also, Spreadtrum (SPRD) is a Chinese communications IC company I've mentioned before on the Buzz & Banter. SPRD is well valued and could be another significant winner here over time as it's developed chips for both the GSM and TD-SCDMA(3G), standards, the latter being just what the doctor order for the coming build-out.

From a psychological standpoint, this announcement could be a shot over the proverbial Olympic bow. I've been wondering if we are going to see a pre-Olympic push and this might just help get one going if it's going to happen.

Again, this deal amounts to a major if not nearly complete overhaul of China's wireless infrastructure. And when we get deals and network upgrades of this size you would think that Cisco (CSCO) and Juniper (JNPR) will be in the mix as well. They certainly could be, and I suspect they will be bidding for multiple deals here, but Huawei has been a fierce competitor of CSCO over the years. I know JNPR has been active in acquiring Chinese business more aggressively in recent years (CHA is a customer), but again, Huawei is a strong core router provider, so time will tell on how some potentially huge router sales will shake out.

Bottom line, this deal is yet another bullish element (or better, a watershed event), in what I believe is a yet to be recognized secular growth trend in the global build-out of the converged next generation triple/quadruple play network.
Position in FNSR, OPTM, SPRD and CSCO.

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