Fortnightly market intelligence covering China's TMT sector produced by Beijing-based research firm BDA China exclusively for Hedgeweek readers.
Handsets: China's handset mountain is gaining altitude again. According to BDA's industry interviews, there are now over 40 million handsets in inventory. Domestic vendors are largely to blame. With too many lookalike products in the market and a dearth of feature phones, local manufacturers have reached out once again to their familiar tool of price cuts in an attempt to clear their warehouses.
Many vendors have resorted to selling handsets below cost, decimating their working capital and their plans to develop and launch of new products, the only hope for getting of their current bind.. Bird is now discounting handsets by up to 30% and subsidizing retailers by RMB 10-30 for each handset sold. Amoi issued an earnings warning for Q3 2004 on October 12th and revealed measures to reduce inventory have lead to a steep fall in the gross profit of its handset business. For more on the prospects for the sector, including how much ground Nokia, Motorola and Samsung can hope to gain, visit bdachina.com/hedgeweek to receive complimentary sample research and learn about BDA's new handset advisory service tailored to fund managers.
Fixed Line / PHS: With over 63 million subscribers, PHS still has legs in China. BDA forecasts over 88 million subscribers by year-end 2005. Key drivers over the next year are SMS interconnection with GSM/CDMA and the launch of the 'PIM', PHS' answer to SIM.
SMS interconnection has been long in the works, but signs are that it's not far off now. PHS-mobile SMS interconnection trials with China Mobile started on October 10th in four provinces (Shanghai, Jiangu, Hebei and Jilin). China Unicom has also signed MoUs with both China Telecom and China Netcom at headquarter level for SMS interconnection and has been implementing trials in Shanghai, Jiangsu, Hebei and Jilin province since early October.
Of course mobile operators have more to lose in potential churn or competition for low end subscribers than to gain from SMS traffic, so they will continue to drag their feet as long as possible and full interconnection will not be achieved before 2005. China Unicom recently stated nationwide PHS-mobile SMS interconnection will only proceed if the trials are successful and if MII requires it although MII originally demanded that PHS and mobile operators realize interconnection by March 2004.
In the meantime, UT Starcom (Nasdaq: UTSI) has launched its first PIM-enabled phone. As with SIMs, PIMs will help drive the replacement market. BDA has a dedicated analyst tracking the PHS market and implications for UTSI, China Telecom and China Netcom. Sign up at bdachina.com/hedgeweek for more on the market.
Internet & Media: Shanda (Nasdaq: SNDA) is negotiating with China Telecom on the shape of its cooperation with the carrier's broadband platform Vnet, which is offering online game cards at a discount to other Shanda distributors. Shanda's contract with Vnet expired on October 15th but has been extended temporarily until October 31st. Odds are that Vnet will adjust its card discounting to match Shanda's practices with third parties in exchange to higher revenue share received from Shanda. If no agreement is reached, both parties will suffer a revenue impact. BDA's Internet & New Media service tracks the online game sector including key players Shanda and Netease (Nasdaq: NTES). Click here for a free research sample.
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