Check on China: China GrenTech Co. Ltd.
With just nine months until the Olympic Games in Beijing, the Chinese government is pouring billions of dollars into infrastructure build-outs in preparation for China's big step onto the global stage. Electric with ambition and awed by its own progress, China is eager to flaunt its emergence as a legitimate 21st-century economic power and to show off its modern, high-tech face to the world.
One of the less outwardly obvious signs of China's growing technological sophistication is the wireless revolution that is sweeping the nation at a breakneck pace. Leading the charge is China GrenTech Co. Ltd. (Nasdaq: GRRF), a top-tier provider of customized wireless communications equipment and radio frequency (RF) technology solutions. Serving major telecommunications companies like China Mobile Ltd. (NYSE: CHL), the world's largest mobile phone operator, and China Unicom Ltd. (NYSE: CHU), GrenTech’s products enable clients to utilize wireless communications and to expand network access to places known for weak coverage, including buildings, highways, railways, tunnels and rural areas.
GrenTech was cautiously rated a "sector perform" in new coverage by analyst Ittai Kidron at CIBC World Markets on Aug. 10. But given the company's recent successes and future potential, a more bullish outlook may be warranted.
In June, executives announced GrenTech won a bid to supply wireless network equipment for next year's Olympic Games and to help China Mobile design and build the wireless local-area network that will provide high-speed Internet connectivity in the stadiums, gymnasiums and surrounding areas in six cities, including Beijing, Shanghai and Tianjin. GrenTech did not disclose the size of the contract, but analyst Adele Mao with Susquehanna Financial Group estimated it to be in the $1 million to $3.5 million range.
While GrenTech’s Olympics role won't significantly impact the firm's bottom line, the games' network will ultimately become the foundation for future citywide wireless coverage, which will almost certainly fall into China GrenTech's lap. And according to experts at Citigroup, the Olympics technology push that has enabled GrenTech to move beyond the realm of mobile phone network equipment into the world of wireless Internet will likely be a pervasive catalyst on China's broader tech industry, spawning even more growth and innovation.
On Sept. 7, the company won a subcontract from Huawei Technologies Co. Ltd. to provide 70% of the wireless indoor coverage for a nationwide GSM network expansion project in Pakistan that will cover over 1,500 cities and towns throughout the country. On Oct. 23, news of RF parts and components orders valued at over $13.3 million from an undisclosed large domestic manufacturer of base station equipment (radio frequency modules) was also announced. The orders are expected to be delivered by the end of the year.
"As more global base station equipment manufacturers start to procure base station RF parts and components in China, and leading domestic base station equipment manufacturers expand their businesses, the landscape for base station RF parts and components in China demonstrates increasing promise," Yingjie Gao, chairman and CEO said in a news release.
An increasing need for around-the-clock connectivity is driving the demand for mobile access technologies among small and medium businesses (SMBs) in China. A study by the research house AMI-Partners revealed Chinese SMBs will invest approximately $7.2 billion on wireless technology this year. And individual consumers with rising disposable incomes and a thirst for Western-style wireless Web and mobile phone technology are part of a growing trend that is showing no signs of slowing. China has more cell phone users than any other country in the world—upward of 190 million. And the Chinese market is growing rapidly, adding about five million new subscribers each month (primarily young people and professionals who use their phones for text messaging, e-mail and Web surfing).
Though China's wireless revolution is still in its infancy and there are strong competitive risks in China's telecom-equipment industry, chances are GrenTech will continue to be a key player in the country's increasingly wireless way of life. The company is well-positioned to cash in on China's 3G (third-generation wireless technology) expansion across its vast urban and rural landscape (56% of the population lives in the countryside, and the appeal of the wireless Web is particularly strong among rural residents who have limited access to the Internet via PCs).
Shares, which have traded between $6.89 and $19.81 over the past 52 weeks, closed at $8.80 on Monday.
Last Wednesday China GrenTech reported the results of its operations for the third quarter ended Sept. 30, 2007. The quarter saw total revenues increasing to RMB273.2 million ($36.5 million), up 45.5% from RMB187.7 million ($25.1) million in the third quarter of 2006. Revenue originating from the company’s base station RF business increased by 1,961% to RMB78.7 million ($10.5 million) from RMB3.8 million ($0.51 million) in third quarter of 2006. Revenue stemming from wireless coverage products and services was RMB194.5 million ($26.0 million), an increase of 5.8% over RMB183.9 ($24.6 million) in the third quarter of 2006.
Third quarter net income was RMB33.1 million ($4.4 million), or RMB1.32 ($0.18) per ADS, an increase of 7.8% over RMB30.7 million ($4.1 million), or RMB 1.22 ($0.17) per ADS in the third quarter of 2006.
In the wake of the earnings release Susquehanna Financial upgraded China GrenTech (GRRF) to “positive” from “neutral.”
Some investors are hedging their bets that the high market-growth potential in RF equipment for 3G wireless networks will spur revenue growth and lead to positive earnings gains and cash flow generation for the company in fiscal 2008.
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