China’s ZTE sharpens focus on 5G after earnings recovery in 2017

ZTE Corp, China’s largest-listed telecommunications equipment manufacturer, plans to intensify its 5G mobile development efforts after returning to profit last year.

Yin Yimin, the chairman of ZTE, said in a regulatory filing late on Thursday that the company expected “an accelerated process of 5G commercialisation” as 4G mobile network operators start to push forward network upgrades.

The Shenzhen-based company reported a net profit of 4.6 billion yuan (US$728 million) last year, rebounding from a 2.4 billion yuan loss in 2016, on the back of healthy revenue growth at its carrier networks and consumer businesses.

Revenue grew 7.5 per cent to 108.8 billion yuan from 101.2 billion in 2016, reaffirming the figure from its preliminary results announcement last month.

That implied a fourth-quarter revenue of 32.2 billion yuan, or 8.7 per cent growth from the same period in 2016, according to Jefferies equity analyst Edison Lee.

“That should remove market concerns about ZTE’s five per cent year on year revenue decline in the third quarter of last year,” Lee said.

He said ZTE’s full-year net profit was within the company’s guidance of between 4.3 billion yuan to 4.8 billion yuan.

ZTE shares in Hong Kong rose 1.6 per cent to HK$29.05 at the close of trading on Thursday.

The company’s turnaround has come a year after it agreed to pay the United States government a record fine to settle a five-year probe of trade sanctions violations, in a move that lifted the ban on US exports of chips and components for its products.

In 2016, the US government had banned Qualcomm and Micron Technology from selling their chips and components to ZTE, in a punitive measure for the Chinese company’s violation of US sanctions.

ZTE agreed to pay a total of US$1.2 billion in penalties to the US government to settle its violation of long-standing trade sanctions on Iran and North Korea. It also agreed to activate audit and compliance requirements to prevent and detect future violations.

In addition, the Chinese firm agreed to a seven-year suspended denial of export privileges, which could be quickly activated if any aspect of this deal is not met, according to the terms of its settlement.

As part of the resolution, ZTE agreed to pay combined criminal and civil penalties worth US$892.4 million. An additional penalty of US$300 million to the Bureau of Industry and Security, which is under the US Commerce Department, will be suspended during that seven-year probationary period.

Last year, ZTE said revenue from its carrier networks business reached 63.8 billion yuan, driven by increased 4G mobile network deployment on the mainland.

Its consumer business, which includes smartphones, totalled 35.2 billion yuan, while its government and enterprise business recorded 9.8 billion yuan in revenue.

China remained ZTE’s largest market, with sales of 61.9 billion yuan last year. The combined geographic markets of Europe, Americas and Oceania contributed 27.3 billion yuan.

ZTE said efforts this year will be focused on 5G research, development and trials as preparations heat up for deployment of the next-generation mobile technology among the world’s major telecommunications network operators.

“5G-related sales will become the core revenue for network equipment suppliers in the next five to 10 years,” said Peter Liu, a research director at research firm Gartner’s communications service provider technology organisation. “ZTE should continue to invest in 5G, and focus on the upgrade and evolution of current networks in the next three to five years.”

ZTE currently has a 5G research and development team with more than 4,500 professionals, covering a range of connectivity, carrier, service and mobile devices programmes.

Huawei Technologies and ZTE are leading the way for China to contribute to the specifications for a universal 5G standard. The international authorities overseeing the creation of a unified standard for 5G mobile technologies are expected to release the final phase in 2019, paving the way for the commercial launch of 5G services around the world.

Huawei and ZTE are not expected to supply network equipment to carriers in the US anytime soon because of security concerns there. Still, both companies supply to all the major carriers in Europe and Asia. Together, they also have the most share of network equipment contracts with China’s three telecommunications network operators.

A 5G study published last year by the China Academy of Information and Communications Technology, the research arm of the Ministry of Industry and Information Technology (MIIT), forecast the combined 5G expenditure of China Mobile, China Unicom and China Telecom to hit a peak of 313.3 billion yuan in 2023.

The research academy also predicted that in 2025 the country’s 5G market would be worth 1.1 trillion yuan, or 3.2 per cent of the mainland’s gross domestic product for that year.

China Mobile, the world’s largest wireless network operator, has said it plans to begin development of trial 5G networks in major mainland Chinese cities from this year, expand these deployments in 2019 and launch commercial services in 2020.

ZTE aims to launch a 5G smartphone in about a year, said Cheng Lixin, the chief executive of the company’s United States operations, in January.

Based on the MIIT research arm’s estimates, the aggressive roll-out of 5G infrastructure in China could see the mainland become the world’s biggest 5G market by the next decade.

Total 5G subscribers on the mainland are forecast to reach 588.3 million by 2022, up from 31.9 million in 2019, according to Jefferies’ Lee.

Ericsson and IHS Markit has estimated that 1 billion people globally are likely to use 5G mobile services within five years, leading to US$12.3 trillion in worldwide economic output by the mid-2030s, while Strategy Analytics forecast global 5G smartphone shipments to reach 1.5 billion units in 2025.