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Analysts Mull Chinese Shakeout

China Unicom Ltd. (NYSE: CHU) has been tipped by analysts to sell its global system for mobile communications (GSM) network to fixed-line carrier China Telecommunications Corp. (NYSE: CHA), causing a potential major shakeout in the Chinese 3G carrier market.

China Unicom is one of the few carriers in the world to operate both CDMA (Code Division Multiple Access) and GSM networks, with each network serving 29 million and 86 million subscribers, respectively. According to Lehman Brothers, primary GSM equipment suppliers to Unicom are Ericsson AB (Nasdaq: ERICY), Motorola Inc. (NYSE: MOT), and Nokia Corp. (NYSE: NOK), whilst Lucent Technologies Inc. (NYSE: LU), Motorola, and Nortel Networks Ltd. (NYSE/Toronto: NT) supply kit for its CDMA network.

Such a strategy is of concern to the Lehman siblings. “China Unicom’s operating results have actually been quite bad and deteriorating in the past several quarters,” comments Lu Sun, Asian telecom services analyst, on a conference call. “We actually expect that in the fourth quarter their net profit will decline again on a quarter-on-quarter basis. So it seems quite obvious that Unicom’s dual network strategy is not working and the government is reviewing several options to increase the yield of those networks.”

“Unicom is clearly finding it challenging investing in two totally different networks,” adds Alan Hellawell, Asian telecom analyst. “In fact, some recent visits to some of the company’s provincial operating subsidiaries, of which it has 31, indicated that Unicom is actually investing below maintenance levels of capex; less than 10 percent and as low as 8 percent capex to revenue on the GSM side. Meanwhile, it seems to be investing in those provinces close to 40 percent of revenue in CDMA capex.”

Hellawell also notes that the carrier’s CDMA network has the potential to support “close to 70 million lines.”

As a result, the Lehman siblings anticipate a major restructuring at China Unicom. “We think it is very likely for China Unicom to sell its GSM network to [wireline carrier] China Telecom over the next several months. In addition, it seems that China Unicom, with the remaining CDMA network, could be quite a marginal player in the industry and so may have to ally itself with the other wireline operator, China Netcom.”

Of course, this is all pure speculation at present, but any potential shakeout does have an interesting effect on the future award of 3G licenses.

“Following this restructuring, it is likely that the government will issue no more than three 3G licenses, possibly in the second half of 2005,” adds Sun. “China Telecom’s possible 3G path will likely be W-CDMA with a partial adoption of TD-SCDMA,” whilst the analyst tips a potential Netcom/Unicom tie-up to upgrade its CDMA technology to 1xEV-DO. Meanwhile, Sun states that market leader China Mobile “has made it very clear it would like to adopt W-CDMA technology.” (See China Preps for TD-SCDMA and W-CDMA: China's No. 1 Son?.)

China Unicom could not be reached for comment at press time.

— Justin Springham, Senior Editor, Europe, Unstrung

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