ZTE’s supercharged 5G rally may take a backseat before it gears up

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Published: February 26, 2019 4:34:11 PM

ZTE’s embarked on a remarkable comeback. The smaller rival to closely held Huawei Technologies Co. became one of the 10 best performers on the MSCI China Index this year after soaring roughly a third over the past week

The ZTE Corp. logo projected on a screen is reflected on a pane of glass at the Ericsson AB booth at the Mobile World Congress Shanghai in Shanghai, China, on Thursday, June 28, 2018. The exhibition runs through June 29. Photographer: Qilai Shen/Bloomberg

ZTE Corp. went from one-foot-in-the-grave to 2019’s technology superstar. Despite a gain of more than 60 per cent that’s pushed its shares well above analysts’ projections, some investors argue that rally still has legs.

ZTE’s embarked on a remarkable comeback. The smaller rival to closely held Huawei Technologies Co. became one of the 10 best performers on the MSCI China Index this year after soaring roughly a third over the past week, propelled by growing optimism over its role in next-generation wireless as well as seeming progress in U.S.-Chinese trade talks. That’s a far cry from 2018 when Washington’s ban on American technology exports briefly brought the company to its knees.

The flip side to the rally is a valuation that has bloated to about 20 times 2019 earnings — roughly 20 per cent above its average over the past three years. And its Hong Kong shares are trading more than 40 per cent higher than their average price target.

Investors are betting China’s largest listed producer of networking gear will be a prime beneficiary for global 5G spending estimated in the hundreds of billions of dollars — and especially at home, the world’s largest telecommunications arena. After a huge loss in 2018, it’s projected to report net income of more than 4 billion yuan ($600 million) in 2019. Its advocates also argue that, so long as U.S.-Chinese trade negotiations don’t collapse and market sentiment holds up, ZTE will continue to find favour.

“ZTE acts like an option on China-U.S. trade talks. The optimistic views have the upper hand now,” said Zhang Gang, an analyst with Central China Securities Co. “As for if the 5G business will boost the share price, it depends on the company’s earnings numbers and the development of 5G projects.”

The company’s Hong Kong-listed stock rose as much as 6.5 per cent Tuesday in a flat market, putting it on track for its fifth consecutive daily gain.

ZTE regained its footing in 2018 after agreeing to pay a hefty U.S. fine and reshuffle management, and the view is that smoother U.S.-Chinese relations will speed its recovery by keeping open a supply chain heavily dependent on American imports.

“Its turnaround is the best entry point, especially with 5G becoming even more of a force for its business next year,” said Hung Yuting, a fund manager at China Capital New Opportunity Fund who holds the stock. “The value of ZTE may be re-evaluated due to the recent positive news related to the company.”

Bruce Yu, a fund manager with Franklin Templeton SinoAm Securities Investment Management Inc., said the trend for ZTE was positive but he would wait for dips in the stock before buying it. And there’re others even less sanguine about whether demand for 5G gear justifies ZTE’s valuation. It remains a bit player in a market dominated by its far larger domestic cousin, Ericsson and Nokia.

“The earnings estimate and contribution of 5G business doesn’t seem to be as big as the public thought,” said Vincent Hsu, a fund manager at Fuh-Hwa Securities Investment Trust Co. “Stock surges related to 5G topics are more like a bull market powered by dreams. The actual gains from the 5G business aren’t big enough to support the price jump.”

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