ZTE, as a world-leading telecommunication equipment supplier, has been in the shadow of the US sanctions since 2012, even the 5G hype in China failed to maintain its PE in a relatively high level.
Compared with the trade restrictions and fines imposed by the US government in 2012 and 2018, the COVID-19 pandemic in 2020 seems to have less negative impact on the Chinese major telecom manufacturer ZTE (00763:HK, 000063:SZ). During the first half of 2020, the company reported operating revenue of CNY 47.20 billion, representing a year-on-year increase of 5.81%; this reflects primarily year-on-year growth in revenue from carrier networks and government and corporate business. Net profit attributable to shareholders for the six months ending 30 June 2020 amounted to CNY 1.86 billion, representing a year-on-year increase of 26.29%.
Despite the increasing business performance in terms of profits and revenues, the company's stock performance has been in a down trend since February 2020. On February 25, the company's Hong Kong share reached a high point at HKD 35.20, and by September 25, the price has fallen to HKD 18.80, representing a nearly 50% decrease in market cap.
Two reasons contribute to the company's gloomy stock performance. First, the investors still consider the international environment, especially the Sino-US tension, as a major risk. As Huawei's smartphone business and HiSilicon has already been badly affected by the US sanctions, there is a general concern that ZTE will come to a similar situation. In 2018 when the US government cut off the company's supply from Intel (INTC:NASDAQ) and Qualcomm (QCOM:NASDAQ), ZTE posted a net loss of CNY 7 billion, which proved the sanctions can be fatal to the company. Second, affected by the global pandemic, the overseas revenue declined 20% year-on-year, while the 5G construction in the Chinese market has also slowed down since the second quarter of 2020. The investors might question the sustainability of ZTE's revenue growth in the following periods.
However, as the price/earnings ratio of the company's H share by September 2020 is around 27, which is below the industry average, the company's A and H shares are to some extent undervalued if external risks are not considered. Besides, as 5G construction both domestically and globally is yet to be completed, ZTE as the leading equipment provider could still find room for revenue growth.