Nov. 23 (Bloomberg) -- ZTE Corp., which is reviving its initial public offering after scrapping the plan last year, will use 60 percent of the proceeds from the sale to expand overseas as revenue from wireless communications in China may decline, according to a document linked to the offer.

The Chinese telecommunication equipment maker, which plans to raise as much as HK$3.1 billion ($399 million) in the IPO next month, will focus on growing in emerging markets after overseas sales rose to 13.4 percent of the total in the first-half from 8.5 percent a year earlier.

ZTE's sales in China may be restricted by the government's plan to develop high-speed mobile phone services. ZTE's major customers, China Telecom Corp. and China Netcom Group, may put more funding into the so-called third-generation network and cut spending on the personal handyphone system, which contributed 46 percent of ZTE's first-half sales, according to the document.

``The current frequency bands utilized by wireless local access networks in China may be reallocated for use by 3G networks, which would have the effect of restricting or shutting down'' the personal handyphone service, ZTE said in its sale document, when detailing the risks of buying shares in the IPO.

The Shenzhen-based company, which has helped build phone networks in Pakistan, India, Russia and Romania, won a $100 million contract in May to supply handsets to Brazil's largest mobile service provider. It also won business from Telecom Egypt to provide communications and data services to the country's code- division-multiple access network.

Mobile Phones

ZTE plans to use 40 percent of the proceeds to develop mobile communications, broadband services and other switching systems. The company will more than double its capital expenditure to 900 million yuan ($109 million) in 2005 to establish a research and development center in Shenzhen.

Shenzhen-based ZTE is offering 141.1 million shares at between HK$17.50 and HK$22 each. It may sell 19.1 million more shares if demand warrants, increasing the offer to as much as HK$3.5 billion, its sale document said.

The company, which competes with Motorola Inc. and UTStarcom Inc., is seeking 74.2 million yuan compensation from U.S.-based Fairchild Semiconductor Corp. which was allegedly supplying defective microchips that regulate power in cell phones and other electronics, the company's document said.

Competition

ZTE is the only Chinese vendor developing a wireless infrastructure for all three standards widely adopted by phone companies. While the potential of 3G services in China may boost the company's sales, competition from overseas telecom equipment makers may limit ZTE's growth, said Eric Wong, an investment analyst at Pacific Sun Investment Management.

``ZTE may not be able to compete with foreign companies on technology grounds and that will affect its future business flows,'' Wong said. ``We also need to take a deeper look at its valuation with the global players before arriving at a decision'' on whether to buy.

ZTE is hoping investors will be lured by the growing demand for telecommunications equipment and increased use of mobile phones. Its net profit doubled to 724 million yuan in the first half of this year from a year earlier, while revenue jumped 45 percent to 10.2 billion yuan.

Gartner Group forecasts sales of global telecommunication services will rise to $1.35 trillion in 2007 from $1.13 trillion this year.

Biggest Phone Market

China, the world's biggest phone market by users, had 325 million mobile phone subscribers at the end of last month, more than three times Mexico's total population. Fixed-line service users reached 311 million, the Ministry of Information Industry said.

ZTE, which has a primary listing in Shenzhen, will be 15 percent owned by the Hong Kong public and 32 percent by domestic Chinese investors after the sale. Shenzhen Zhongxingxin Telecommunications Equipment Co. will own 45 percent.

The company's shares will start trading in Hong Kong on Dec. 9.

Goldman Sachs Group Inc. is arranging the sale. ZTE, which previously hired JPMorgan Chase & Co. for the sale, was forced to scrap the IPO in April 2003, citing poor market conditions.

To contact the reporter on this story: Cathy Chan in Hong Kong kchan14@bloomberg.net

Last Updated: November 23, 2004 04:06 EST