UTStarcom Likes Chinese

UTStarcom Inc. (Nasdaq: UTSI), a telecom access equipment maker, says it has invested $10 million in shares of China Telecommunications Corp. (NYSE: CHA), its largest customer. The vendor bought China Telecom shares at the carrier's initial public offering price of $18.98 a share.

China Telecom's IPO, completed yesterday, raised more than a billion dollars for the carrier, even though its shares have yet to trade above the offering price (see China Telecom IPO Lacks Sizzle). In afternoon trading on Friday, China Telecom shares traded up $0.28 (1.5%) to $18.24, making UTStarcom's $10 million stake worth about $9.6 million.

The timing is interesting. UTStarcom recently announced that it has signed a $53 million contract with China Telecom to install its IP-based PAS (Personal Access System) gear in two cities in southwest China. UTStarcom derives about 70 percent of its annual revenues from China Telecom and the dozens of local phone companies it controls.

But the Alameda, Calif., company says the investment is not linked to the contract. "Our purchase of shares was not contingent on any contract" with the carrier, says Chesha Kamieniecki, UTStarcom's investment relations manager.

But the IPO investment, which harkens back to the days of the bubble, at the very least represents good politics. China Telecom was, until very recently, a state-owned monopoly. Now the carrier controls the 21 provinces in South China, and, though it has competition, its competitors are wholly or majority owned by the Chinese government, according to China Telecom's filings with the U.S. Securities and Exchange Commission (SEC).

That said, if an investment can be seen as a vote of confidence in the new China Telecom, it can only help UTStarcom to continue to cozy up to the carrier. Indeed, UTStarcom's investment comes at a time when its relationship with China Telecom may be entering a new phase.

China's telecom deregulation could cause quite a bit of change in UTStarcom's business there. For one thing, equipment purchasing decisions that were once made by small municipalities are now being consolidated at higher levels. "We are seeing some larger contracts," says Kamieniecki. "There is some consolidation at the provincial level, but it's still not handled at a national level."

Another question is whether the Chinese government will ever allow China Telecom or its main competitor to the North, China Netcom Corp. Ltd., to offer cellular services via GSM or CDMA. Right now both service providers offer mobile phone service using UTStarcom's PAS fixed wireless handsets and networking gear. The PAS system is cheap and provides citywide wireless phone service, but it lacks the roaming capabilities that GSM and CDMA offer.

UTStarcom, however, believes deregulation might actually help PAS deployments. "Each of the operators now... have charters to compete in each other's territory," says Kamieniecki, "and PAS is a less expensive way for them to roll out service in a competitor's territory."

Shiv Putcha, an analyst with Yankee Group's wireless mobile Asia-Pacific group told Unstrung back in May (see China's Long March to 3G) that he does not expect licensing auctions before 2003. The government might then actually sell licenses to China Telecom and China Netcom, Putcha says.

And, though about 80 percent of its revenues come from China, UTStarcom is aggressively working to diversify its revenue stream and has started talking up big deals in the works in India. It also recently announced a deal with Cable & Wireless (NYSE: CWP) to deploy about 80,000 lines of its ADSL gear in Panama.

UTStarcom employs about 2,900 people and has about $360 million in cash and investments. At a time when telecom executives are skittish about giving financial guidance, UTStarcom says it anticipates its annual revenues to be $960 million in 2002 and more than $1.2 billion in 2003.

— Phil Harvey, Senior Editor, Light Reading

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