Donald Trump’s known unknowns are clouding tech hardware values

PUBLISHED : Sunday, 29 April, 2018, 9:05am
UPDATED : Sunday, 29 April, 2018, 9:06am

The ground is shaking. After the United States slapped ZTE with a seven-year ban on component purchases from American suppliers, no one knows how to value China’s technology hardware companies any more. 

The latest casualty is Huawei Technologies. The Justice Department is investigating whether Huawei violated US sanctions related to Iran, The Wall Street Journal reported this week.

It’s another slap for the network-equipment and smartphone giant, which was already facing bond investors jittery over rising Treasury yields and intensifying US-China trade tensions.

Huawei has been holding a roadshow for new dollar and euro debt. Earlier this week, even before the Journal article was published, the company had to drop the planned dollar portion. Now, it’s been forced to postpone the euro bond sale too.

At any other time, Huawei’s debt offerings would have been gobbled up. Its earnings before interest, taxes, depreciation and amortisation hit US$10.7 billion last year, a 26 per cent increase from the previous 12 months.

Is ZTE ban the start of a tech war between China and the US? 

Meanwhile, as of the end of last year, the company was sitting on US$26.9 billion of cash with only US$6.1 billion of liabilities.

Huawei got a mere 6.5 per cent of its sales from the Americas last year. But US revenue isn’t the point. President Donald Trump has finally found a way to halt China’s technological advance. By banning supplies of a few key components, the US can hobble China Inc.’s ability to build functional smartphones, or internet networks.

Investors can’t dismiss the possibility that Huawei will slide from riches to junk status one day with just a wave of Trump’s pen. Rising Treasury yields add interest-rate risk to these political hazards.

Meanwhile, fund managers on the mainland are trying to figure out what to do with their ZTE stock, which has been halted from trading in Shenzhen since April 17. Many funds piled in last year, as the company was seen as a major beneficiary of China’s push to develop 5G wireless networks.

First Seafront Management has been the most aggressive in writing down holdings, cutting the value of its shares to 22.82 yuan (HK$28.42) apiece, or 27 per cent below the last traded price.

At least 30 fund managers have lowered their net asset values because of ZTE, according to Chinese media reports.

Companies related to ZTE – suppliers or peers – are suffering too. Lenovo Group is now at risk of being removed from Hong Kong’s benchmark Hang Seng Index.

It’s not just Chinese companies that are affected. In the US, shares of Acacia Communications, which counts ZTE as a key customer, have plunged 30 per cent. The Philadelphia Stock Exchange Semiconductor Index is down 6.6 per cent. 

With China vowing to develop its own core semiconductor technology at all costs, there’s also evidence that this Trump-induced frenzy is distorting capital allocation.

China’s call for ‘core technology’ breakthrough belies its weakness in semiconductors

Gree Electric Appliances is the latest to jump on the chip bandwagon. The air-conditioner maker’s shares slumped more than 9 per cent in Shenzhen on Thursday, wiping out US$4.2 billion of market value, after it declined to pay a dividend for the first time in a decade. 

The reason? The company, which posted a 45 per cent increase in 2017 net income to 22.4 billion yuan, said it planned to spend more on research and development for, among other things, integrated circuits.

To be fair to Gree, China’s booming private funds are chasing a few hot industries and stocks: chip makers are still a scarcity and command much higher valuations than white goods.

Analysts may argue that sanctions are just a bargaining chip for Trump in his trade negotiations with China. But the threats are having real effects, causing billions of dollars to be lost and diverted. It will take a brave investor to predict values in such an unstable environment.