Posts Tagged ‘motorola’

Nokia to remain the market leader … helped by Emerging Market expansion

nokiaNokia the worlds biggest manufacturer of mobile devices , still enjoys a 40% global market share, dwarfing it’s nearest competition; Motorola (NYSE : MOT), Sony-Ericsson, Samsung, & LG. The company is particularly strong on an international basis, with top market share in practilally all markets served. More importantly, from a MyStockVoice perspective, 80% of sales come from outside the US. With recent advances in 3G licensing in Asia, notably Vietnam, India & China, Nokia (NYSE : NOK) looks well set to come out as the real winner from the mobile broadband explosion.

The company’s scale allows it to produce what is now regarded as a commodity product (low-end cell phones) at a much cheaper prices than it’s competitors. Nokia’s dominace in the mobile handset market sees it  earning roughly 15% profit even on entry-level units, while it’s most profitable competitor, Samsung, reputedly earns slightly above 13%.

Nokia is also working on growing it’s service offerings, expanding into music & games, whilst adding compatible location based services (LBS)with the recent acquisition of NAVTEQ. The strategy being that Nokia can earn incremental revenue from these services whilst building brand loyalty/customer lock-in, as users become accustomed to Nokia’s services & will opt to replace their existing handset & existing services with another Nokia model instead of migrating to a competitor.

From a financial point of view, Nokia holds an enviable position. The current balance sheet shows €5.5 billion against about €4.4 billion in debt, 70% of which is in short term notes.  Return on capital is pretty impressive to date, since 2004, ROIC is over 160%, & standard return on capital is equally impressive at 75%. Operating margins run at circa 13%, with free cash flow at 9%. For the long term investor, Nokia also has a track record of delivering a dividend yield of close to 4%. That said, the dividend rate was cut by 20% in January to reflect the impact of the gloabl downturn.

Nokia is clearly facing some major competition in the high end “smartphone” category, which is judged to be the fastest growing sub-sector of the market. While Nokia is still the world’s biggest smartphone maker, competitors Apple (Nasdaq : AAPL) with the iPhone & Research in Motion (Nasdaq : RIMM) with its Blackberry range have both  quickly gained market share , whilst Asian manufacturers such as HTC are also proving to be a thorn in the flesh.

My take is that if Nokia can crack some key markets in SE Asia, India & China, they will be able to surpass their upstart rivals, although in China, native handset makers will obviously have a first pass; e.g. TD-SCDMA with China Mobile . Nokia has a long track record with Vodafone, Orange & Telefonica, all of whom are increasingly active in Emerging Markets. With a retrospective look at the last quarters results & with the current overly sold price, I am looking at Nokia as a winner, 6 moth personal target price of $18.50 on the ADR

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China looks to 3G networks to help stimulate economy

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After repeated delays, China is set to award 3G licenses by beginning of 2009. China’s Minister of Industry and Information Technology (MIIT) Li Yizhong announced on December 12 that 3G network licenses will be issued by the beginning of next year and the country’s three restructured telcos are expected to invest CNY 200 billion (US$29 billion) on network upgrades to support the rollout. This is the culmination of more than 10 years development of the Chinese 3G standard TD-SCDMA & this years general restructuring of the domestic telecoms market in both fixed & mobile sectors.

The three main players in the Chinese mobile sector, China Mobile (NYSE – CHL), China Telecom (NYSE – CHA) & China Unicom (NYSE – CHU) are being awarded licences based in a Byzantine effort to keep control, whilst at the same time hedging bets on the success of particular technologies.

Beijing’s move comes as the industry completes a restructuring that the government says is intended to create “healthy competition”. China Mobile dominates the industry with a market share of more than 70 per cent. As part of the restructuring, China Mobile is taking over China Tietong, a niche player, while China Unicom is merging with China Netcom, a leading fixed-line company. China Telecom is taking over those mobile operations from Unicom that use the CDMA standard dominant in the US, while Unicom is to concentrate on the European GSM standard. The introduction of 3G is expected to spark heated competition as China Unicom and China Telecom seek to catch up with China Mobile.

As expected, China Mobile, the market leader, will receive a licence for TD-SCDMA, the country’s homegrown 3G standard. China Unicom, the second-largest player, is to receive a licence for W-CDMA, the European standard. China Telecom,  the incumbent fixed-line operator but a newcomer in mobile services, will be given a licence for CDMA 2000, the US standard. Previously, it was expected that China would issue the 3G license in the second quarter of 2009 or even later. However, to meet operators demand for the 3G licenses and to motivate China’s economy and stimulate domestic demand, the government has pulled forward the license allocation.

Apart from the time needed for restructuring of the telecom industry, it is seen by many that the delay in 3G awards is to give breathing space needed in national efforts to further develop and rollout its home-grown technology. As the largest global wireless market, with currently 630 million mobile users and 250 million Internet users, China has wanted to wean itself off western technology.

Expenditure on 3G networks is seen by the Chinese government as one of the measures to offset the slowing economic growth. The rewards in terms of intellectual property that can accrue from the success of China’s TD-SCDMA will be massive and much attention will be focused on how it stands to the rigours of full commercial operation.

 “Huawei and ZTE China’s biggest telecom hardware suppliers, stand to benefit the most from 3G investments while non-Chinese vendors face a shrinking share,” said Duncan Clark, chairman of telecoms consultancy China BDA

That said, Alcatel Lucent (NYSE – ALU) recently announced a deal with China Mobile, Motorola (NYSE – MOT) has announced a vendor contract with China Telecom & Nokia (NYSE – NOK) via its Nokia Siemens Networks JV, has already signed more than $500M of contracts this year, in addition, Nokia is committed to providing TD-SCDMA compatible handsets to China Mobile, which is a particularly lucrative piece of business.

In my view, TD-SCDMA is unproven & after tests earlier this year, handset returns were running at 12%, compared with a GSM industry standard of 2%. The fact that the two smaller players are using well developed network technology, which have a plethora of applications & services already running, means that China will get what it neeeds, equilibrium in the mobile sector. My thoughts run to shorting CHL into the first quarter & running long on both CHU & CHA.

Am looking forward to revisiting this in a few months time.

UPDATE 1 (19/12/08) : China TMT reports on the network vendors here  Chinese telecom equipment suppliers to outdo overseas companies in 3G era

As virgin territory for 3G suppliers, competition in China will be fierce. Foreign equipment suppliers are eagerly awaiting China Unicom’s WCDMA tender, in which they expect a larger market share than in China Telecom and China Mobile’s past tenders. For example, it has been reported that Ericsson is aiming to capture at least 30 percent of China Unicom’s WCDMA equipment tender, while Nokia Siemens has also set its sights high. Some industry analysts have told Interfax that price wars will be far more brutal than in China Mobile’s TD-SCDMA tenders, as the government will take a more hands-off approach

UPDATE 2 (29/12/08) : China Telecom CDMA contracts as reported by China Tech News

China Telecom’s CDMA tender result for 342 Chinese cities came out in mid-October 2008 and statistics at that time showed ZTE and Huawei gained 25% share of the tender, Alcatel-Lucent gained 19%, Motorola gained 16%, Nortel gained 14% and Samsung gained 2%.