Restructuring telecommunication operators. China’s restructuring of its telecommunication operators (telcos) is expected to benefit Sinotel, brought on by the expected capex spending byChina Unicom and China Telecom. Both companies have announced capex budgets ofRMB100b and RMB80b respectively, over the next two to three years, for their wireless networks.A portion of these budgets are likely to be allocated to the enhancement and expansion ofexisting wireless network infrastructures. As a provider of wireless network applications andproducts, and given its good relationship with the telcos, Sinotel is in a good position to ride onthe positive effects of the restructuring.

3G network also to boost business growth. With the impending launch of the 3G network,Sinotel has started selling 3G network cards (through China Unicom) in July 2008. This hascontributed to the growth in revenue in the Distribution Solutions segment. Demand for 3G cardsis expected to continue to be strong, going forward, as the network matures.

Balance sheet remains healthy. Although its cash balance at end 9M08 has reduced (fromRMB144.6m at end FY07 to RMB30.6m), largely due to the addition of fixed assets, Sinotelremains in a net cash position. Sinotel has a net cash position of RMB7.9m at end 9M08. Thisworks out to RMB2.8¢ per share or S 0.63 ¢ per share.

Valuation and recommendation. There are no comparable companies listed on the SGX.Therefore we compare Sinotel with similar companies listed in Hong Kong. Its peers are currentlytrading at an average of 2.2x forward P/E or 0.4x P/B. At the current price of S$0.085, Sinotel istrading at 0.9x forward P/E or 0.2x P/B. We peg our valuation of Sinotel to its peers, and arrive ata target price of S$0.20, based on 2.0x FY09 P/E.

We initiate coverage on Sinotel with a BUY recommendation.