With China’s big three state-owned telecom operators rolling out fourth-generation (4G) mobile networks aggressively across the nation, equipment manufacturers are eyeing a windfall in new orders, with domestic firms particularly excited as Beijing has proposed greater use of locally-made hardware.
Among the companies hoping to get a big boost is Shenzhen-based ZTE Corporation (00763.HK), which last week reported a profit of 1.3 billion yuan for 2013, reversing a loss posted in the previous year, thanks to strong shipment growth in mobile handsets and good overseas business.
The earnings turnaround came despite a 10 percent drop in revenue due to weaker sales of feature phones. Revenue was also dented overall as China issued 4G licenses only at the end of 2013, delaying mobile carriers’ network capital expenditure.
But now, as all the top three telecom operators — China Mobile (00941.HK), China Telecom (00728.HK) and China Unicom (00762.HK) — have outlined plans for larger capital spending this year for the 4G rollout, ZTE is gearing up for a surge in order flow on the back of its established strengths in the market, especially in the homegrown mobile technology.
ZTE continued to focus on profitability in winning carrier contracts last year. That led to a 8.69 percentage point increase in gross profit margin in the segment to 37.36 percent, thanks to stringent cost control.
Cost control has indeed emerged as the key for telecom equipment makers like ZTE as equipment prices are expected to fall due to intense competition. In a survey conducted by investment bank UBS, 42 percent of the respondents said they expect telecom equipment prices to drop at faster-than-usual pace over the coming year, while 30 percent said they expect a “typical” decline of 10 to 15 percent. It marked a shift from a previous survey which showed 80 percent of the respondents anticipating prices to fall at their normal rate or less.
In China, one should keep a close eye on the profit margin trend this year, given the fact that mobile operators are facing pressure to reduce their costs and offer cheaper services to users. That could prompt the operators to ask suppliers to lower their contract prices, posing risks to the suppliers’ margins.
Market research firm Gartner has said China Mobile’s huge 4G roll-out will be more of a boon for domestic firms Huawei Technologies and ZTE, with the two suppliers seen winning two thirds of the contracts. Meanwhile, it will be a mixed bag for foreign suppliers such as Ericsson, Alcatel and Nokia. The overseas firms can boost their sales but it will come at the expense of margins as they will have to face up to the competition from Chinese players.
The 4G rollout, apart from the network equipment division, will benefit ZTE’s smartphone business due to the expected massive growth in shipments. The company aims to ship 60 million smartphones this year, up 20 million units from last year, due to strong momentum in China, as well as in the US, Japan and Europe markets. That should offer some buffer for the company to compete in the carrier network market.
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