The Day Ahead: AsiaInfo and UTStarcom cash in on China's growth

Both IPOs look promising, but if you don't like to worry about regulatory problems, you may find better investments elsewhere

AsiaInfo and UTStarcom, two Internet infrastructure companies focused on China, should cash in on the hot initial public offering (IPO) market as investors drool over the growth prospects.

Aside from the growth prospects for China -- always good for a little Wall Street euphoria -- both companies also have some meat on the balance sheet and strong sales. Each company has a dominant market position, but is likely to encounter a few government headaches along the way.

We'll start with Beijing-based AsiaInfo, the better choice of the two IPOs. AsiaInfo, which provide telecommunications infrastructure software and services, is offering 5 million shares priced at $24 (£14), the top of its increased range of $18 to $20 (£11 to £12). Morgan Stanley Dean Witter is the lead underwriter.

In filings, AsiaInfo said it is the largest network software vendor in China and has a proven track record because it built ChinaNET, the country's first commercial and largest national Internet backbone. The company's products include messaging, billing and customer management software. AsiaInfo has sold 1.8 million customer management and billing software licences, nine million licenses of its messaging software, and seven million licences of its wireless telephony billing and customer management software.

With its first mover advantage, AsiaInfo has recorded some impressive sales. For the year ending 31 December, AsiaInfo reported sales of $60.3m (£37m) with a loss of $4.9m (£3m). The company had been profitable in 1998, but didn't make any guarantees about future profits because of research and development spending and other investments. Another risk to note: China Telecom and China Unicom accounted for about 87 percent of the company's 1999 backlog.

Major competitors for systems integration include local players Suntek and Aotian, as well as US information technology powerhouses, such as IBM and Hewlett-Packard. For billing software, AsiaInfo cited Portal Software as its main competition. On the messaging front, AsiaInfo competes with Software.com and Netease.

UTStarcom, which sells telecom equipment to wireless and wireline service providers in China, is selling eight million shares in the United States and two million shares in Japan. Merrill Lynch was the lead underwriter and Softbank, which owns a stake in ZDNet and also owns a stake in UTStarcom. Shares priced at $18 (£11), the top of its raised $16 to $18 (£10 to £11) price range.

According to regulatory filings, UTStarcom offers a suite of network access systems, optical transmission products and subscriber terminal products that enable voice, data and Internet access services. UTStarcom, based in Alameda, California, with manufacturing facilities in China, outlines the growth prospects quickly -- there are seven phone lines in China per 100 people. That statistic means there's a lot of room for growth in a country with a population of 1.3 billion.

Chinese service providers have installed over 900,000 lines of the company's Airstar wireless access system and 1.2 million lines of its wireline AN-2000 access system. That customer base has led to some strong revenue totals. For the year ending 31 December, UTStarcom reported sales of $187.5m (£116.2m) and a loss of $18.5m (£11.4m). Expenses are typically denominated in Japanese Yen and US dollars, while sales are usually in the Renminbi, China's currency.

The competition for UTStarcom is fierce. The company cites Alcatel, Ericsson, Lucent Technologies, Motorola, Advanced Fibre Communications, Nokia, Cisco Systems, Nortel Networks and dozens of local companies as competition.

Both of these companies look promising, but if you don't like to worry about regulatory problems, you may find better investments elsewhere. Both companies said their customers are directly or indirectly owned and controlled by the Chinese government.

The most obvious issue facing the two companies is China's acceptance into the World Trade Organisation (WTO). If China gains WTO status, it would invite more competition from foreign firms. That's the bad news. The good news is that investment in the telecommunications sector would surge. In filings, UTStarcom said it has to worry about licensing, vague regulations and other moves to keep the Chinese government happy.

On the licensing front, UTStarcom could face stiff financial penalties if it sells gear without the government paperwork. The company said it thinks it has some of the required the licences, but can't be too sure because the regulations "are not very detailed".

Other issues for UTStarcom include a likely $500,000 (£310,000) penalty for tariffs owed from components ordered in 1997; exchange rates between the US dollar and Renminbi and government currency controls; and regulation of the Chinese telecommunications industry and foreign investment.

AsiaInfo also has the same regulation and exchange rate worries, and noted that Internet infrastructure spending depends on government funding. In 1999, Internet infrastructure spending slowed from 1998 levels. In addition, AsiaInfo said investors may not be able to enforce judgments by US courts against it because executives, assets and shareholders are based principally in Beijing, China and Hong Kong. Put simply, AsiaInfo investors can kiss those frivolous shareholder lawsuits goodbye.

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