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China's telecoms boom is not the golden opportunity it might seem. At
least not if you are ZTE, the Nasdaq-listed supplier that made its name
with western investors by selling a cheap-and-cheerful mobile
communications technology called personal handyphone system (PHS).

The PHS gravy train has hit the buffers and so ZTE's sales from
mainland China dropped 7.7% year-on-year to 12.8bn yuan. It has also
been hit by a 40% rise in R&D costs. The combination of these two
factors meant that overall revenue rose just 6.6% to 23bn yuan and net
profit dropped 40%.

ZTE said the
drop in sales in China was due in part to the decision of telecom
operators to shift their focus and investments to third-generation (3G)
services from CDMA and personal handyphone system (PHS) networks.

Like the rest of the equipment supply industry, ZTE has suffered
from the uncertainty surrounding the licensing of 3G networks in China.
ZTE claims to have won supply contracts worth between 2bn and 3bn yuan
to build new 3G networks for China Mobile, although the government has
still to officially award licenses to operate the new broadband
networks.


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