HONG KONG (Reuters Breakingviews) - China’s 5G noise is scrambling positive signals from ZTE. A three-month ban that stopped U.S. suppliers from selling parts to the telecoms-equipment giant dragged it to a $1 billion loss in 2018. ZTE’s Hong Kong shares are up almost 50 percent so far this year anyway, on the promise of next-generation networks. That looks premature.
Accusations from U.S. authorities that it had breached a 2017 settlement over sanctions violations left the $16 billion state-backed group on the brink of collapse. An April 2018 ruling barred American companies from exporting to ZTE, crippling its smartphones and telecoms equipment businesses. That ended after ZTE agreed in June to pay out $1.4 billion in penalties, and replaced top executives.
Wednesday’s results show the extent of the damage. The Shenzhen-based company fell to a full-year net loss of 7 billion yuan ($1 billion), from a net profit of 4.6 billion yuan a year earlier. ZTE’s new chairman and chief executive in August had assured shareholders that things were back to normal, but revenue in the December quarter was still down 17 percent year on year, battered by its handset unit.
Investors, though, have been willing to look through the trouble, eyeing a much bigger prize ahead. China’s three main carriers are expected to pour billions into new ultra-fast wireless networks nationwide. Beijing wants to become a global leader in 5G technology, and that’s good news for ZTE, larger rival Huawei, and mobile mast-operator China Tower.
But the messaging from Beijing and the operators on the scale and timing of the rollout has become more hesitant of late. The carriers, for instance, have been conspicuously vague on their commercialisation plans. Last week, China Telecom and China Unicom announced lower-than-expected 5G capex plans for 2019, while market leader China Mobile did not disclose any specific figures at all. Analysts at Jefferies cut the trio’s 5G capex for the next year by more than a fifth, to 105 billion yuan, and reckon peak spending won’t occur until 2023.
ZTE’s Hong Kong-listed shares have now more than doubled from a low last July. The stock trades at 17 times forward 12 months earnings, Refinitiv shows, above the average 15 times in 2017. A delayed 5G windfall makes that look generous.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.