Breakingviews – China's 5G noise blurs ZTE's positive signals

HONG KONG (Reuters Breakingviews) – China's 5G noise blurs ZTE's positive signals. A three-month ban that prevented US suppliers from selling parts to the telecom equipment giant resulted in a $ 1 billion loss in 2018. ZTE shares in Hong Kong have increased by almost 50% since the beginning of the year. Year, despite the promise of a next generation networks. This seems premature.

The US authorities' accusations that she has violated a settlement reached in 2017 after sanctions violations have left the $ 16 billion state-backed group on the brink of collapse. A ruling issued in April 2018 prohibited US companies from exporting to ZTE, crippling its smartphone and telecom equipment business. That ended after ZTE agreed in June to pay $ 1.4 billion in fines and replaced senior executives.

Wednesday's results show the extent of the damage. The Shenzhen-based company posted a net loss of 7 billion yuan ($ 1 billion), compared to a net profit of 4.6 billion yuan a year earlier. ZTE's new president and CEO in August badured shareholders that the situation was back to normal, but December's turnover was still down 17% from the previous year, manhandled by his unit of handsets.

Investors, however, have been willing to look through the problems, anticipating a much bigger price ahead. The top three Chinese operators are expected to pour billions of dollars into the country's new ultra-fast wireless networks. Beijing wants to become a world leader in 5G technology, which is good news for ZTE, its biggest rival Huawei, and for China Tower mobile tower operator.

But messages from Beijing and operators on the scale and timing of deployment have become more hesitant lately. Carriers, for example, have been visibly vague about their marketing plans. Last week, China Telecom and China Unicom announced 5G capital investment plans lower than expected for 2019, while the market leader, China Mobile, had not revealed any specific figures. Jefferies badysts have reduced the trio's capex 5G for next year by more than a fifth, to 105 billion yuan, and estimate that spending will peak in 2023.

ZTE shares listed in Hong Kong have more than doubled from last July's low. Shares are trading at 17 times earnings over 12 months, says Refinitiv, above the 15-fold average in 2017. A delayed windfall in 5G gives this result a generous appearance.