ZTE jumps after UBS upgrade, Vodafone deal

(Adds details on Vodafone deal, reports, share moves)

HONG KONG, Feb 14 (Reuters) - China's second-largest telecoms gear maker, ZTE Corp. (0763.HK), jumped nearly 9 percent in intraday trade on Wednesday after UBS upgraded the stock and British mobile giant Vodafone (VOD.L) agreed to buy its mobile phones.

UBS upgraded its recommendation on ZTE, which with larger rival Huawei Technologies [HWT.UL] dominates the business of supplying telecoms gear on its home turf, to "buy" from "neutral", citing local media reports it could secure a third of the 19 billion yuan ($2.5 billion) in contracts to be awarded before building a third-generation network.

The parent of China Mobile Ltd. (0941.HK) (CHL.N) was expected to award the contracts to roll out 3G networks -- which enable blazing Internet access and multimedia -- based on a homegrown TD-SCDMA standard soon, the 21st Century Business Herald said.

The Chinese newspaper, which was among several local newspapers to report the potential deal, said total equipment contracts would amount to 10.4 billion yuan and added that China Mobile could extend TD-SCDMA trials to more cities.

Other telecoms equipment makers likely to be awarded TD-SCDMA contracts include Alcatel Lucent ALU.PA and Nokia (NOK1V.HE) and a sprinkling of smaller local players, according to the newspaper.

UBS also raised its price target on ZTE's Hong Kong stock to HK$43.0 from HK$38.0. The shares retreated from a high of HK$37.50 to end Wednesday 5.22 percent higher at HK$36.30.

"Despite the uncertainty, we believe China's TD-SCDMA capex in 2007 should record significant upside from our current forecast of 2 billion yuan. As a result, we forecast TD-SCDMA will contribute 2.4 billion yuan in revenue to ZTE in 2007," UBS said in a research report.

"We believe that the final decision will not be made until March, after the Chinese New Year," the investment bank said.

Also helping ZTE's rally was news on Tuesday that Vodafone Group Plc (VOD.L) had signed an agreement to buy a range of mobile phones from the Chinese vendor.

A ZTE spokesman said on Wednesday that the first batch of the second-generation handsets, which will carry the Vodafone brand, would be made available in major markets this summer.

"Cooperating with Vodafone is a breakthrough for ZTE," he said without elaborating.

ZTE said this week it wanted to derive up to 10 percent of its sales from Europe in two or three years, as it makes headway in mature markets abroad.

About 40 percent of ZTE's sales now come from outside China, mainly in emerging markets such as India and Africa. It aims to increase that to 50 percent this year or next.

($1=7.754 Yuan)