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ZTE Corporation: smart lines Premium

Telecom equipment maker somehow bucks the slowdown in China’s smartphone market
Lex
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ZTE said second-quarter profits should grow a better than expected 32% year on year © Bloomberg


JULY 20, 2017
On Wednesday Shenzhen based telecom equipment maker ZTE Corporation delivered a bolt from the blue. It has somehow bucked the slowdown in China’s smartphone market announcing that its second-quarter profits should grow a better than expected 32 per cent year on year to Rmb1.08bn ($160m). Its Hong Kong listed shares duly jumped by a tenth.

Investors can be forgiven any surprise. Earlier this week, competitor Ericsson’s shares fell 15 per cent after it revealed quarterly sales had fallen 8 per cent year on year. Moreover, the Swedish group forecast the market for wireless telecom equipment would shrink this year as operators shift expenditures from wireless to fixed line. It added that sales growth for smartphones, around a third of ZTE group sales, is slowing in China where ZTE’s market share is already under pressure from domestic rivals Huawei, Vivo and Oppo.

And yet ZTE is well placed to weather these headwinds. Ericsson’s largest revenue decline was in Europe and Latin America, where ZTE has little wireless exposure. The group ranks second though in fixed line market share, according to Ovum, a consultancy. That bodes well if Ericsson’s forecast about fixed line spending turns out to be true.

Flogging more telecoms equipment appears to be compensating for softer smartphone demand. Last year equipment helped drive a 10 per cent revenue increase in ZTE’s home market, which accounts for three-fifths of sales. It is number two there after Huawei. Analysts at Jefferies attribute a Rmb7.1bn inventory build-up to a delayed recognition of capital expenditure at its customers.

The US Commerce Department’s probe in March may have spooked ZTE investors, but a 50 per cent share price rally since then should not be attributed to mere relief. Even after Wednesday’s rise, ZTE’s price to forward earnings ratio is a quarter below Ericsson’s. It remains a good call.

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