ZTE (000063): 5G main force is now striding forward from scratch
The company’s 5G technology R & D and testing progress has kept ahead, and the market competitiveness has further improved. The company has set up 15 R & D centers around the world, nearly 2.
60,000 R & D personnel, focusing on R & D and innovation in communication technology, are among the top 70 global innovation companies.
The company has applied for 3,500+ patents for 5G patents, 3,900+ patents for chips, of which 200+ patents for 5G chips, and 3 authorized patents worldwide.
In the 5G three-phase test led by the Ministry of Industry and Information Technology, the company ranked second and ranked second among Huawei’s five major equipment vendors, second only to Huawei.
The company has core competitiveness in 5G communication equipment. The company has gradually submitted more than 7,000 papers on 5G-related goals to 3GPP. Until June 2019, the company has disclosed 3GPP 5G SEP (standard essential patent) to ETSI (European Telecommunications Standardization Institute).Family, with a global share of 12%, ranking third in the world.
In 3GPP, the most important international standards organization for global 5G standard formulation, the company serves as the vice chair of the two working groups of RAN2 & RAN3.
The company’s overall technical level of 5G communication equipment leads the world. The company’s 5G technology is second only to Huawei, and it is significantly ahead of Nokia and Ericsson in terms of time.
GlobalData believes that the company’s 5G RAN, Core and transport network products have fully entered the leader quadrant.
At present, the company has advanced 35 5G commercial contracts in advance and cooperated with operators worldwide for more than 60 years for 5G.
The company is expected to benefit from China’s 4G heavy farming and 5G construction. There is room for improvement in its internal share. Looking back at the history, the internal 3G business is later than the world. Chinese communication equipment vendors have clearly benefited, and overseas equipment vendors have made rapid progress.
Although 4G commerce is expected to be about 2 years late in overseas countries earlier than the previous year, it is basically synchronized with the world, and Chinese equipment manufacturers have benefited significantly.
In 2013, Huawei’s operator revenue accounted for 26% of the top five equipment vendors, and it has increased to 47% in 2018.
The reason is that the first is the scale of capital expansion of Chinese operators, which accounts for about 20% of the world’s total. The second is that the 4G equipment of Chinese equipment vendors will be used in China to reduce costs, mature products, and improve global competitiveness.
At present, Chinese operators are still re-cultivating and expanding 4G, and the company is expected to maintain its historical share (about 30% +), and the gross margin of capacity expansion will increase.
In the 5G cycle, China’s commercial process is in the first echelon in the world. Chinese equipment vendors are expected to fully benefit, and Huawei’s expansion has been large and subject to certain restrictions. Therefore, we predict that global operators may give ZTE more opportunities.
In addition, part of the two major overseas equipment manufacturers in China may be replaced (mainly for reasons such as technology, backward delivery capabilities, etc.).
We expect that the company’s 5G base station expansion in China is expected to increase to 35% + (2021-2022).
Ericsson, Nokia China’s regional revenue share continued to decline in 2016-2018, Ericsson’s Northeast Asia revenue share from 13.
2% returns 11.
5% of North American revenue accounted for 26%.
4% to 30.
From 2016 to 2018, Nokia’s Greater China revenue accounted for 11%.
2% recognized 9.
Global telecom operators are under pressure to operate, creating a return opportunity for ZTE. The overall operating pressure of global operators has penetrated. Even under the siege of the United States and other countries, Chinese equipment manufacturers still have opportunities.
From the perspective of ZTE’s operator customers, in 2017, revenue declined and EBITDA declined in approximately 20 years.
Therefore, we believe that the current major contradiction of ZTE customers is that they face great challenges in operation and need cost-effective equipment. There is an urgent need to reduce operating costs for a long period of time in the future, which will give ZTE overseas market recovery and furtherExploit and create favorable conditions.
Of course, in addition to the above reasons, we believe that the continuous improvement of the company’s own technological competitiveness and compliance with regulations are the basis for global expansion.
In fact, the company broke through France Telecom in 2019, for which the Spanish company will build a 5G network in Valencia.
The company’s 5G base station shipments and orders are speeding up, and the global expansion of the 5G cycle is expected to increase 5G base station shipments: Huawei has exceeded 400,000 AAU (updated in October / 2019); ZTE has exceeded 50,000 AAU (2019/26/2019Update).
Number of 5G base station contracts. Data for September 2019 show: 65 Huawei (50 at the end of June), 48 Nokia (43 at the end of June), 35 ZTE (25 at the end of June), 29 Ericsson (22 at the end of June))).
In the future, we believe that the company’s 5G share in overseas markets has room for extension and improvement. In the short term, it is mainly Europe and the Asia-Pacific region.
Mobile phone business: 2G / 3G brilliant, 4G defeat, 5G may usher in opportunities. The company ‘s mobile phone business department was established in 1998, and achieved rapid development in the 2G / 3G era. In 2012, mobile phone sales reached 67.34 million units, the fourth largest in the world and the first in China, Market share 3.
Since 2016, the company’s mobile phone business has continued to decline, with only 10.5 million units per year in 2018, with a market share of 0.
We believe that the reasons for the failure of the company’s mobile phone business are: first, excessive reliance on the operator’s customized market, which leads to insufficient product innovation; second, unclear positioning, and missed the window of smart phone development.
Although the company later strengthened research and development and expanded the public market, the result was high costs, which led to a reduction of nearly US $ 3 billion in 2016. After that, the company’s strategic contraction, we expect the company’s mobile phone business to be replaceable in 2019.
In order to ensure the technical capabilities of end-to-end solutions, the company will still retain the mobile phone business.
We believe that the first is that the company will control; the second is that the company’s 5G mobile phone will be launched in time, which is expected to become a deep 成都桑拿网 technological opportunity for technology and innovation; the third is that the company is currently re-expanding the US operator market (2017 revenue of 12 billion,(The forecast for 2019 is only a few hundred million yuan).
IDC data, as of September 2019, ZTE’s domestic market share for 5G mobile phones1.
5%, ranking fifth.
The government and enterprise market has been cultivated for ten years, and the “Double Hundred Thousands” cooperation plan has been released. The company has been working hard to promote business development. The company has been working in the government and enterprise field for more than ten years. It has established the first domestic smart city brand.Major projects such as the three links, two platforms, and cloud desktops have achieved breakthroughs in the layout of energy and transportation, the successful deployment of the State Grid IMS, and the wireless products successfully exceeded the railway C3 project.
The company has become the world’s most important Chinese company in communication energy and a comprehensive network energy solution provider with global service capabilities. It is a leader in green and intelligent data centers. In the field of charging modules, the company’s energy products have served 160 countries / regions worldwide.386 operators serving more than 260 data center customers.
In June 2019, the company released the “Double Hundred Thousands” business plan, which clarified the main battlefield of government and corporate affairs.
“Double Hundred Thousands” means “hundred cities, thousands of districts, and top 100 enterprises.”
The “100 cities” is the top 100 cities in China’s GDP. The “Thousand Districts” is a broader district-county market with clear construction and development plans under the advancing trend of digital government and new smart cities.As a target of 100 Chinese companies in the world’s top 500, “Thousands of Enterprises” is an industry and enterprise that is just in need of strong digital transformation.
The company comprehensively lays out switches, routers, servers, system software (operating system, database, etc.) and video services (the domestic HD video conference terminal based on self-developed video processing chips) for the government and enterprise market, so the company is expected to enter government procurementList to gain the trust of more corporate customers.
Improved management, the company’s fair incentives and solidarity, the goal of unlocking in 2019 is expected to achieve the company’s new senior management team, younger, more from the grassroots (with rich experience in research and development and product), pragmatic work style, the company gradually resumed operations after taking office, Get a high internal evaluation.
We believe that improved management and strategic focus will be the company’s development potential and foundation.
Since 2009, the company has gradually implemented three equity incentive plans, which perfectly match the 3G, 4G, and 5G cycles.
In 2017, the company implemented the third equity incentive, the unlocking conditions are 2017-2019, the ROE is not less than 10%, and the net profit attributable to the parent (without deduction) is not less than 42.
07 billion, 45.
900 million, 49.
We expect the company to complete the target of equity incentive requirements in 2019.
The company’s main business has returned to the best level in history. We believe that the company’s operations have returned to normal.
In 2019H1, the company’s gross profit was the same as 2017H1 ($ 17.5 billion) in the case that its revenue was less than $ 9.4 billion in 2017H1 ($ 54 billion), the best in history.
In 2019H1, the company’s operator business gross margin reached a record high, reaching 44.
At 73%, the gross profit margin of government, corporate affairs and consumer businesses also recovered significantly.
Corporate expenses, impairment losses increased significantly, other gains increased and decreased, affecting net profit realization in 2019H1, the company’s period expenses were well controlled, except for financial expenses (short-term expenses of 34.6 billion US dollars, 2017H117.4 billion US dollars), management expenses increased significantlyRegulations and legal affairs), sales expenses have been significantly reduced (focus on core regions and core businesses), and total expenses have decreased by 3 compared to 2017H1.
7.1 billion yuan.
In 2019H1, the company increased its impairment (increased by 8.
600 million), reducing other benefits (less 5).
08 billion), net profit is less than 8.
With the improvement of the operation, the company will increase its fundraising, the company’s gross profit and net profit will decrease. The company and Huawei have similar business structures, but the gross profit and net profit are significantly different, and there is relatively room for improvement.
Since 2013, the company’s and Huawei’s gross and net profit margins have begun to increase, and reached a relatively high point in recent years in 2014, which is related to the construction of 4G in China.
But after that, the gross profit margin began to decrease. We believe that the subsequent expansion of gross profit margin is related to competition and the increase in the proportion of mobile phone revenue.
We expect a similar trend in the 5G cycle, but the pace of 5G construction is smoother than 4G, so the improvement in gross profit margin and net profit may last 3-5 years.
ZTE’s gross profit margin is on the rise, but it is still 5pp + behind Huawei, and its net profit rate in 2019H1 has returned to a significant previous level.
We believe that the company’s gross and net profit margins have room for improvement: first, expansion and revenue improvement, scale effects will appear; second, the company’s strategic focus, shut down overseas representative offices / subsidiaries with general development prospects, and reduce low gross profitBusiness; the third is the gross profit margin of mobile phone and government business is picking up; the fourth is to increase the net net proceeds of 114.
US $ 5.9 billion, which can effectively alleviate the company’s financial pressure (the company’s short-term loan of 301 was reported in the third quarter of 2019.
In the early stage of 5G, due to the consideration of contention for competition, the possible reduction in the gross profit margin will affect the company’s operator’s business gross profit margin, but the subsequent expansion and expansion will increase.
Considering PE and DCF, we believe that the company’s reasonable city size is 208.4 billion-242.2 billion US dollars, corresponding to the closing growth space on February 14.
Considering the improvement of company management, the continuous improvement of technological competitiveness, and the market share there is room for improvement. Maintain the “Buy” rating and continue to recommend it.
Risk reminders: 1. The global and China 5G development is less than expected; 2. The market competition is intensified and the gross profit margin is growing rapidly; 3. The company’s market share is less than expected; 4. The epidemic situation has caused the company’s short-term business development to be impacted; 5.Under the US issue, the company’s supply competitiveness and overseas development potential.