3Com Corporation (COMS) has become a leader in the Chinese enterprise networking market in China. However, we do have concerns over the future of COMS business in China as it reduces its dependence on Huawei as a reseller, which contributes close to a quarter of revenue.

3Com plans to grow its top-line and accelerate integration of its worldwide operations to achieve further operational efficiency and increase its market share. The company is working on a workforce reduction plan, including the closure of facilities, which will help the company to further reduce its cost structure and demonstrate an improvement in earnings.

Following the failed acquisition by Bain Capital Partners, COMS shares have fallen to a price level well below the price they were trading at before the announcement and well below where our Sell recommendation was issued and the corresponding $3.00 price target. The company has since attained profitability on a non-GAAP basis and posted strong growth in China. Our six-month target price of $2.50 represents a P/E multiple of 12.5x estimated fiscal 2009 EPS of $0.20.

With improved results and a strong fourth quarter, we believe current holders of COMS shares would be better served by holding the shares for a more attractive exit point. We therefore maintain a Hold rating on the shares of 3Com.