PHS MoU Newsletter Briefing - January 2006


- Key Trends in PHS
- 3G
- Operator Strategies
- PHS Value Added Service


Key Trends in PHS

Exhibit 1: PHS Subscriber Statistics

PHS users grew at a slower pace in October and November with just 1.40 million and 1.00 million new subscribers, down from 1.53 million in September. In the past 4 months, PHS growth has been slower than POTS. This is attributed to weaker promotion of PHS by operators.

Meanwhile, as PHS user growth slows, total PHS handset output dropped sharply by 30.8% year-on-year to 14.52 million units in the first 11 months of 2005, according to the MII.

BDA expects PHS users will reach 87.6 million by year-end 2005. New subscribers in 2005 are expected to total 22.4 million, slightly down from 28.2 million in 2004. In 2006 PHS operators will continue to promote PHS service. BDA forecasts the total PHS users will exceed 100 million in 2006 reaching 105.8 million by year-end, with 18.2 million new subscribers added during the year.


3G

BDA believes 3G licenses will be issued before telecom carriers are restructured, not at the same time. The first license is likely to be issued in 1H 2006. We believe the government will first issue a TD-SCDMA license in order to give the home grown standard a head start. We maintain our view that China Telecom is the most likely to receive a TD-SCDMA license.

In terms of restructuring, the existing 4 carriers are likely to be consolidated into 3, with China Mobile remaining unchanged, China Telecom acquiring or renting Unicom's GSM and China Netcom merging with Unicom's CDMA.


Operators' Strategies

PHS operators to promote Home Box in 2006

Operators hope Home Boxes will help retain fixed line and PHS subscribers and increase ARPU by routing additional calls over fixed-line networks. According to UTStarcom and press reports, Home Box, a fixed-mobile convergent service, is expected to increase ARPU by RMB 5-10 for fixed line subscribers.

There are already 10 cities that are believed to have launched QBox services, with estimated 120,000-150,000 users. In Shanghai, China Telecom reported over 100,000 users by January 2006, since it launched QBox in September. China Telecom gave free QBoxes to users who promise to spend at least RMB 158 or RMB 208 per month on fixed line phone and PHS for 2 years. In Beijing, China Netcom has already started promotions, giving the QBox and PHS handsets for free to users who prepay RMB 800 in voice fees.

Exhibit 3: Shanghai Telecom QBox Packages (Million)


Cost could be a key challenge to developing the Home Box market since Home Boxes cost RMB 500-1,000 each, including the fixed line phone and PHS handset. Telecom operators will subsidize Home Box terminals to attract users initially, but its unclear how much they will continue to invest in PHS Home Box subsidies once 3G licenses are issued.

Telecoms operators target to attract 1.5-2.2 million Home Box users in 2006, with China Telecom planning for 1.0-1.5 million and China Netcom for 0.5-0.7 million.

Value Added Service

China Telecom reported strong growth of PHS SMS and CRBT service

China Telecom reported strong growth of PHS SMS and CRBT services by 3Q 2005. Revenues from PHS VAS reached RMB 1.33 billion by September 2005, up by 1394%, compared with the same period of 2004.

PHS SMS is the major PHS VAS, contributing 78.2% of PHS VAS revenue in the first 9 months of 2005. There were 25.6 million PHS SMS users by September 2005, representing 46.1% of China Telecom's PHS subscribers. In September, PHS SMS users sent 1.3 billion pieces of point-to-point SMS in total, averaging 51 pieces of SMS for each SMS user. Point-to-point SMS still dominates SMS traffic, accounting for 81% of total SMS volume in September. According to China Telecom's data, 78.8% of PHS handsets support SMS service, so terminals are no longer a barrier for the continued growth of SMS.

CRBT service also surged in 2005, following its 2004 launch. CRBT service contributed RMB 290 million in the first 9 months of 2005. There were 13 million CRBT users by September 2005, up from about 1 million at year-end 2004.

Exhibit 4: China Telecom PHS VAS Revenue Breakdown by Services in the First 9 Months of 2005


Comtech to provide PHS LBS in 3 cities

Comtech (Nasdaq: COGO) recently entered the PHS LBS market, providing LBS handset design and software solutions. Comtech will also act as a service provider in PHS LBS trials (using LBS handsets specially designed for kids) in Guiyang with China Telecom and 2 northern cities with China Netcom starting from January 20th 2006. Comtech expects to expand the PHS LBS service to more than 50 cities across China by the end of 2006, if the trials in the first three cities are successful.

Comtech's new location-based Xiaolingtong handset is designed for children between the ages of six and twelve. Parents can find the location of their children carrying the handsets by calling a toll-free number or by logging onto the internet. Comtech is also planning to launch a similar handset designed for seniors and other age groups in 2006.

Beijing Netcom to launch QBox, LBS and call transfer service in 1H 2006

China Netcom's subsidiary in Beijing will launch three value-added services for PHS in 1H 2006 including QBox, LBS and a call transfer service, according to press reports quoting Beijing Netcom. The call transfer service called iSecretary service, transfers missed calls to another pre-set telephone number allowing subscribers to receive calls even when they are out of coverage areas.