4G To Power ZTE Back To Profits
The China telecoms world is buzzing this week at a major trade show in Shanghai, with everyone giving their latest outlook on commercial 4G services that could launch later this year. Leading the headlines was a forecast of return to profits for embattled telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063), as predicted by one company official. Meantime, leading telco China Mobile (HKEx: 941; NYSE: CHL) was giving new details about its massive 4G build-out planned for the rest of the year, and its 2 main rivals were also discussing which technology they will use for their networks.
All of the buzz reflects the huge expectation building around 4G, which is coming to China later than most of the world due to the slowness of the nation’s telecoms regulator in issuing licenses. Most people expect the regulator, the Ministry of Industry and Information Technology (MIIT), to issue its 4G licenses before the end of this year. The big question is what technology requirements will come with each license, which could potentially cause headaches for the nation’s smaller 2 carriers, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA).
Let’s start with a look at China Mobile, which is already well advanced in building and testing a 4G network based on a homegrown technology called TD-LTE. China Mobile’s massive spending plan for 2013 reflects the broader state of the industry, as everyone gets set to invest billions of dollars to build new networks.
China Mobile previously said it has budgeted a massive 190 billion yuan, or about $30 billion, for capital spending this year, with about $7 billion of that to go to building up its 4G network. At the telecoms show in Shanghai, Chairman Xi Guohua said the company plans to boost its current count of 4G base stations nearly 10-fold to 200,000 by the end of this year, compared with just 22,000 now.
That massive build-up, combined with similar 4G spending worldwide, led a top executive at ZTE’s TD-LTE division to forecast the company would return to profitability this year after posting a massive loss for 2012. (Chinese article) ZTE was one of the biggest winners of contracts to build China Mobile’s 3G network, based on another related homegrown technology called TD-SCDMA.
Many expect the company to win big contracts for 4G as well from China Mobile, though crosstown rival Huawei and big foreign names like Ericsson (Stockholm: ERICb) and Alcatel Lucent (Paris: ALUA) are also bidding hard for new contracts. I suspect we’ll see the Chinese equipment makers win more than half of China Mobile’s 4G contracts, and quite possibly up to two-thirds of the awards, which could mean a nice windfall for ZTE.
Lastly, let’s take a quick look at China Telecom and Unicom, which have been far more low-key in their 4G plans than China Mobile. Both companies were expecting to build 4G networks based on a globally developed technology called FDD-LTE, which is more mature and generally more reliable than the homegrown TD-LTE. But China Mobile was asking the regulator last year to force one or both of its rivals to build their 4G networks using TD-LTE. (previous post)
Now the latest signals from Unicom and China Telecom executives at the show indicate that both are trialing at least some form of TD-LTE equipment in case they get forced to build networks based on the homegrown technology. (English article) All of this indicates that the MIIT is still trying to decide how it wants to proceed with the 4G licenses, which looks similar to its indecisive posture when it awarded 3G licenses back in 2009. My guess is that it will issue 4G licenses to all 3 telcos simultaneously around October or November, and that Unicom and China Telecom won’t be forced to exclusively adopt the TD-LTE standard.
Bottom line: China’s issue of 4G licenses should come around the fall, with the massive spending on new networks helping to return ZTE to profitability.
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