STEP INTO A lift and your conversation on the mobile phone is likely to get cut off. Such frustrating signal losses also could happen when you are overseas on mass rapid transit trains, highways and in rural villages. On the other hand, mobile phone reception in supermarkets located in the basement of shopping malls in Orchard Road is usually excellent. Why?
The answer lies in whether a network optimization system has been installed in the building or on surrounding infrastructure.
SGX-listed Sinotel Technologies is a wireless network services vendor which designs and installs such systems in China. It serves the big boys: About 93 per cent of its 1Q09 revenues came from its network solutions for China Mobile and China Unicom, which together dominated 95 per cent of China’s huge mobile phone service market last year.
I had the opportunity to meet Sinotel’s young soft-spoken CEO who speaks impeccable English, when he was in town recently. “The current global economic crisis doesn’t affect China’s telecommunications sector,” said Jason Li Zhenyu, 35, who is also Sinotel’s chief technology officer.
“China’s main growth drivers arise from demand for infrastructure networks – for highways, rail and telecommunications,” continued Mr Li.
Sinotel stands to be a beneficiary of the tremendous potential for telco growth in China. Mobile phone penetration in China is still less than 50 per cent, compared with 105 per cent in Singapore, 83 per cent in South Korea and 75 per cent in North America.
That’s why the number of mobile phone users in China has increased unabated in every one of the past 12 consecutive months. This is astounding considering that as many as 26 million Chinese workers (15 percent of migrant worker population) have lost their jobs in the current economic crisis. The management believes that growth in China’s telco sector will remain robust until mobile phone penetration nears the level of developed nations.
The global significance of the market that Sinotel is in was recently articulated by telco analyst Kim Tae-Hyung of Pyramid Research, the telecom research arm of the Light Reading Communications Network – that telco infrastructure in China will drive global private sector capital expenditure in 2009.
Investment demand for the building of production lines may have plummeted but network operators in Asia Pacific are sticking to their overall investment plans as mobile phone users are still hungry for higher bandwidth space, according to Mr Kim.
Furthermore, January 7 this year was a historic day for the sector when 3G mobile phone licenses were granted to China’s three main carriers, China Mobile, China Telecom and China Unicom, with service launch scheduled around May. With the advent of 3G, telcos are getting ready to offer bells and whistles such as video streaming and video calls on the mobile phone.
Whether demand takes off depends to a large extent on whether technical hitches frustrate mobile users attempting high volume data transfers. The telcos will need Sinotel’s network support solutions, which have been smoothing glitches for mobile users downloading ring-tones and using multimedia messaging (MMS).
In March 2009, Sinotel penetrated the Jiangsu province with orders worth Rmb 42.9 million. And this is from just four of 16 major cities in the prosperous eastern coastal province.
Sinotel obtains its indoor contracts by identifying buildings with weak mobile signal reception. It then obtains permission from the building’s real estate manager to install wireless network infrastructure, which is paid for by the telcos. Its wireless infrastructure solutions have already been installed in over 400 commercial, government and residential buildings, including China’s National Museum, the Beijing Railway Station and some of Beijing’s landmark hotels.
There were as many as close to a thousand wireless network services vendors 10 years ago, according to Mr Li, but only 40 to 50 are still in business today. For these, survival is sweet as demand for wireless networks is now three-pronged: First, there is the big picture demand for mobile phone lines from end users. Second, in China’s numerous far-flung cities, it is less costly to install mobile service infrastructure compared to for fixed lines, so telcos prefer this. Finally, China’s three telcos have each adopted a different 3G platform, meaning that every building will require 3 systems instead of one.
The remaining 7 percent (Rmb 7 million) of Sinotel’s 1Q09 revenues came from distributing 3G Internet PC cards, introduced in July last year.
1Q09 group revenues were Rmb 96.6 million while net earnings were Rmb 28.8 million, translating to a handsome net profit margin of 29.8 percent.
Sinotel may be small compared to players like Hong Kong-listed network solutions vendor Comba, which booked revenues of HK$2.5 billion in FY08, but Westcomb Securities analyst Lee Khai Chian highlighted that Sinotel’s operating margin is the highest among its closest competitors. According to its CEO, Sinotel’s marketing strategy of focusing on its targeted provinces before advancing to the next province has the advantage of lowering distribution and marketing expenses.
Year-on-year revenue growth in 1Q09 was a robust 24.0 percent. The company attributed the 15% top line growth in its wireless network solutions to increased contribution from its proprietary Emergency Mobile Base Station (“EMBS”).
The interesting thing about Sinotel’s EMBS is the role it played in disaster relief during the Great Sichuan Earthquake. China had won much praise from its netizens and the international media alike for its swift disaster relief action when the tragedy struck in May last year. The earthquake had destroyed Sichuan’s base stations, which are wireless communications towers that enable mobile phone network coverage within a vicinity.
What Sinotel did to restore network coverage to the trouble-stricken areas was to mount its mobile radio frequency communications system on top of a vehicle. It has since begun collaborating with a satellite communications solutions provider to jointly produce EMBS for police automobiles.
Its 3G network cards are inserted by end-users into personal computers or laptops to facilitate high-speed wireless Internet access. Sinotel is one of the pioneers in developing and distributing the 3G network card in collaboration with China Unicom. Its cards may also be installed in other wireless mobile devices such as point-of-sales machines, personal digital assistants (PDAs) and monitoring systems. Sinotel believes it is one of a handful of companies in China with license to produce such cards.
So what will 2009 look like? Firstly, Sinotel’s order book as at 31 Mar 2009 was huge, amounting to Rmb 390 million. A large portion of this will contribute to FY09’s top line, as the average project takes 150 days to deliver, according to its chief financial officer, Lo Fui Chu.
Here are some other statistics that made me sit up.
Fixed phone lines are giving way to mobile phone lines. China’s mobile phone subscribers increased 17 per cent year-on-year to 670 million as at end March 2009, according to the Ministry of Industry and Information Technology of the PRC. In contrast, the number of fixed phone lines fell 7 per cent to 335 million over the same period.
About 45 per cent of the people in China now live in urban areas, 45 percentage points lower than in developed countries and 4 per cent lower than world's average level, said Yao Jingyuan, chief economist of China’s National Bureau of Statistics in January this year. As China continues its path of economic development, increasing demand for commercial properties will drive demand for Sinotel's wireless network solutions.
China’s three full-service telcos were formed from an industry-wide merger of six service providers, each formerly specializing in either mobile phone service or fixed phone line and broadband. Now, China Mobile and China Unicom, both formerly mobile phone services operators, will also provide fixed line and broadband services. Likewise, fixed line & broadband service provider – China Telecom – is now also a mobile phone services player. Market opportunities on entirely new platforms for each of the three bellwethers meant massive and separate infrastructure capital expenditure plans from each one.
Massive capital expenditure in the hundreds of billion yuan to upgrade from 2G as well as plans to expand 2G reach in rural areas are also in the cards. Here’s what the telcos announced recently: China Mobile has budgeted Rmb 133.9 billion on capital expenditure this year. China Unicom’s will be Rmb 110 billion and China Telecom’s Rmb 39.2 billion.
One negative aspect of the network solutions vendor business is its need for lots of working capital. Sinotel takes about half a year to collect its accounts receivables.
Analysts caution that raising capital in today’s tough credit environment may be a problem but the management points to its revolving facilities of Rmb 65 million available from HSBC and DBS, and making the point that financing is not an issue for companies with strong business models. Sinotel’s gearing ratio (debt-net assets) remains relatively low at about 8 per cent.
This article was recently published in Pulses magazine and is republished here with permission.
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