AN ARTICLE IN THE WALL STREET JOURNAL indicated that "Beijing could hand out 3G licenses to telecom operators as soon as mid-December". The article cites the potential for at least $44 billion in spending on 3G technology over the next three years. A Bloomberg article also indicated that the China National Radio reported that 3G licenses could be issued by the end of 2008 and $116 billion could be spent on the 3G network buildouts and associated services.

Thus, a long running saga may come to an end. China's 3G license saga has been carrying on for a few years now, however, the growing buildout of the 3G TD-SCDMA "trial network" in China supports the eventual reality that 3G licenses need to be issued. After TD-SCDMA, WCDMA and CDMA2000 networks are expected to be built out in China in the coming years. As such, eventually a license for each must be issued.

We believe Cogo Group (ticker: COGO) is the best play in our universe on China's 3G story due to the company's entrenched positioned with local telecom equipment vendors such as Huawei, ZTE, Datang Mobile and others.

Additionally, the mobile phone business is expected to benefit as consumers upgrade to 3G handsets. Recall, Cogo generated 35% of sales from mobile handsets and 30% from telecom infrastructure in the third quarter of 2008. The China Mobile TD-SCDMA phase 2 bidding process (28 cities) was recently completed and revenue for telecom infrastructure players is likely to be more meaningful in 2009. Additionally, there is already discussion of a phase 3 TD-SCDMA buildout that could enter a bidding process in 2009 and be twice as large as phase 2.

Cogo's stock is down over 80% year to date and trading slightly below cash-per-share of $3.16 and well below tangible book value-per-share of $4.36. As such, we believe Cogo represents an attractive value at current levels with limited downside potential, despite the challenging tech demand environment. Our 12-month price target of $5.15 is based on 8 times our calendar year 2010 pro forma earnings-per-share projection of 64 cents. Our price-to-earnings target is inline with the electronics supply chain and well below the long-term growth rate we believe the company can achieve. Risks to our price target include: demand for tech; trends in China; integrating acquisitions; margin trends for modules; the loss of an important customer; and the loss of a key executive or engineers.

Source:barrons