On the evening of October 28, ZTE announced its third-quarter financial report. The financial report shows that in the third quarter, revenue was 26.930 billion yuan, a year-on-year increase of 37.18%; net profit was 855 million yuan, a year-on-year decrease of 67.83%.
Affected by this, ZTE's intraday drop was 3.88% to 33.16 yuan, and the market value of ZTE fell to 152.9 billion yuan.
As a leading stock in the 5G concept of the A-share market, ZTE has fluctuated all the way since March, and has fallen by nearly 40% so far, and its market value has evaporated by 100 billion. The drop in stock prices after the announcement of the financial report also shows the distrust of ZTE in the capital market.
In fact, the decline in stock prices is also related to the domestic epidemic. However, through the financial report of ZTE and some market actions, Songguo Finance believes that there are still many opportunities and challenges.
Revenue in the first three quarters increased by 15.39% year-on-year, ZTE's revenue expansion began to achieve results
ZTE Corporation is a comprehensive communications solution provider, serving customers such as operators and government and enterprise networks (governments, enterprises) and mainly doing to B services. Benefiting from the rapid development of domestic 5G construction, the total revenue in the first three quarters was 74.129 billion yuan, a year-on-year increase of 15.39%.
1. The increase in revenue is due to the recovery of the domestic epidemic. ZTE’s main market is in China, which accounts for 67% of its total revenue, the Asian market accounts for 15% of its total revenue, and the European and American markets account for 12%. Due to the rebound of the domestic epidemic, the market is under control, so that the revenue of Central Communications has increased to a certain extent. At present, ZTE has built 5G benchmark networks in many domestic cities.
2. Self-developed 7nm chips have been commercialized in the market, increasing revenue. Compared with the self-sufficiency rate of base station chips during the ban two years ago, the self-sufficiency rate of base station chips was almost zero. Now ZTE's self-developed 7nm chips have been commercialized in the market, and the company has transformed technology leadership into market leadership and turned it into profit. On the main control chip of 5G wireless base stations, switches and other equipment, ZTE will also have a lot of room for development.
3. Achievements have been made in the field of 5G mobile phone terminals. According to the 2019 Global Telecommunications Equipment Market Report released by the market research company Dell Oro Group, the top five suppliers with revenue share are Huawei (28%), Nokia (16%), Ericsson (14%), ZTE (10%). %) and Cisco (7%).
In fact, the traditional communication field is updated almost every ten years, and 5G has put forward new tests for high performance and fragmentation requirements. At present, the market share of overseas manufacturers such as Nokia and Ericsson has decreased considerably, while ZTE has released its first 5G video phone, ZTE Tianji Axon 11. This share may continue or even increase in China.
Net profit in the first three quarters decreased by 34.30% year-on-year. ZTE's rapid expansion creates potential risks
In the domestic market, ZTE Corporation has successively won the bids for centralized procurement projects of 5G RAN, 5G SA core network and 5G bearer by the three major domestic operators. At the same time, ZTE and its partners have jointly explored 86 innovative 5G application scenarios, carried out more than 60 demonstration projects, and built 5G+ smart manufacturing demonstration projects with many leading companies.
Cui Li, vice president of ZTE, predicts that in terms of 5G share, he hopes that the domestic 5G market share will reach more than 35% in the future. However, the seemingly bright prospect is mixed with a problem that cannot be ignored. This is also directly reflected in ZTE’s financial report. ZTE’s net profit in the first three quarters was 2.712 billion yuan, a year-on-year decrease of 34.30%. So, what caused the sharp drop in ZTE's net profit?
1. R&D expenses increased. ZTE’s R&D investment in the third quarter was 4.154 billion yuan, a year-on-year increase of 43.85%. In the first three quarters, ZTE’s cumulative R&D investment has reached 10.791 billion yuan, accounting for 14.56% of revenue. This is mainly because the current 5G base station power consumption is still high and the development of 5nm chips has accelerated.
As China's largest listed communications equipment company, ZTE still remains high in research and development expenses. Its R&D expenses in 2019 were 12.55 billion yuan, a year-on-year increase of 15.1%, accounting for 13.8% of revenue. In the past three years, the cumulative R&D investment was 36.42 billion yuan, with an average annual investment of 12.14 billion yuan. In the past six years, R&D investment accounted for revenue. The proportions are maintained above 10%. At present, ZTE has formed a complete product matrix in the 5G field, including core technology fields such as 5G wireless, core network, bearer, access, and chips.
2. Further expansion of overseas markets will increase costs again. Currently, ZTE has launched 5G commercial deployments in major 5G markets such as Europe, Asia Pacific, and the Middle East. In the African market, ZTE has signed a commercial contract for the transformation of the cross-border backbone transmission network with the Zambian subsidiary of MTN (Africa’s leading mobile network operator). The two will jointly build a network covering 15 cities and key towns, covering approximately 930 kilometers. The expansion of overseas business has further increased the cost of the backbone optical network.
The current ban on Huawei in the United States also gives ZTE a rare opportunity. ZTE, which accounts for the second share of domestic 5G base station shipments, is expected to replace it and grab more shares. After all, in overseas markets, ZTE and Huawei have a high degree of overlap in market distribution.
The rapid development of 5G, ZTE still has long-term value-added space
In 2018, ZTE was sanctioned for violating export control regulations and was fined US$892 million for “extraordinarily unreliable”. ZTE also ushered in a cliff-like decline in the stock market. And now ZTE is slowly getting rid of the haze. According to data from third-party market research institutions, ZTE’s operator network products will increase its global market share by 2% in 2019.
1. A certain breakthrough in technology has been achieved, and a patent moat has been formed. In addition to the commercial use of 7nm chips, ZTE's 5nm is also in the experimental stage and is expected to be commercialized in 2021. According to the latest report from IPLytics, a world-renowned patent data company, ZTE Corporation’s ETSI 5G standard essential patents disclosed a total of 2,561 families, ranking third in the world. Years of technological investment have also allowed ZTE to form a patent moat.
2. The African and Southeast Asian markets will continue to add energy to ZTE. After cooperation with the operator MTN, the network will become the first ultra-100G backbone optical network in southern Zambia, which will also help ZTE continue to win large orders in Africa, Southeast Asia and other regions. As of the end of September 2020, ZTE has won 55 5G commercial contracts worldwide, and has launched 5G cooperation with more than 90 operators worldwide, covering more than 500 industry partners. The construction of overseas markets will also bring long-term benefits.
3. The company's business continues to streamline. While keeping the investment in technology research and development unchanged, ZTE will continue to control costs in terms of sales expenses, management expenses, and financial expenses. Last year, ZTE further reduced the company's business and scale. The spin-off of non-main business and unprofitable subsidiaries, and the screening of products with low market potential and long-term unprofitability and foreign markets, will bring about a significant increase in the profit of the main business in the future.
4. The technical strength is still insufficient, and the competition is still not to be underestimated. After the arrival of 5G, the deployment density and number of base stations have increased sharply, and the cost of power consumption has become the top indicator that operators pay attention to. The more advanced the chip, the higher the energy efficiency ratio.
But in terms of technology, Huawei has always been better than ZTE. Take the 7nm chip as an example, unlike Huawei Tiangang, ZTE’s 7nm chip is only the main control chip in the base station, not a separate integrated SoC, and only the chip design is implemented, not the manufacturing link, so the structure and performance are still There is a certain gap with Huawei's 5G base station products.
Although 5G is an upsurge, the current world is no longer the communications market that was rapidly developing and expanding at the beginning. In overseas markets where Huawei can hardly breathe, it is not certain who will be the biggest winner. ZTE still has a long way to go. .
Author: rather lack
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