TELECOMS: Huawei Feasts on China Market

Bottom line: Huawei’s strong revenue and profit growth for 2017 are coming largely on the back of its home China market, which should continue to boost the company as Beijing aggressively pushes upcoming 5G services.

Telecoms giant Huawei is in the headlines as the new week begins, with word that the company has rekindled its profit growth in its latest reporting year. Unlike other companies, Huawei isn’t publicly traded and thus isn’t required to release any financials, which always means we need to take their numbers with a slight grain of salt. But generally speaking the company does seem to be trying to report meaningful figures, at least based on past years when the results weren’t all that flattering.

This time around the results look good, at least the final ones for revenue and profit growth. But a closer look shows something that many of us know, namely that the company is heavily dependent on its home market for that relatively strong showing. Some of that is probably deserved, as Huawei has emerged as a maker of quality products for both its core networking equipment and also its newer smartphones, which count myself as one of their fans and owners.

All of this underscores just how big a consumer China has become in the global telecoms market, thanks in no small part to the country’s aggressive spending on wireless services. That spending spree includes hundreds of billions of dollars on networking equipment by the nation’s three wireless carriers, which have in recent years shown a strong propensity to purchase from Huawei and ZTE (HKEx: 763; Shenzhen: 000063), China’s other big equipment maker.

On the consumer side, Huawei has also rapidly built up a large business selling smartphones, which are gaining a reputation as some of the world’s best in terms of quality. The company is sinking big money into developing its own smartphone chips and even perhaps an operating system (OS), as it attempts to replicate the huge success of Apple (Nasdaq: AAPL), whose success is due in no small part to use of proprietary software and hardware at the center of its hugely popular and profitable iPhones.

That big investment has paid off handsomely for the company in its home China market, which is the world’s largest and where Huawei is the top player. Huawei now gets about 60 percent of its smartphone sales from China. It’s trying to broaden its reach outside, but has had limited success, especially in the US where it has met with political opposition due to security concerns. That means its growth potential in that area is likely to be somewhat restricted going forward.

All that said, let’s zoom in on the numbers that show just how dependent Huawei is on its home market for its growth story. The big-picture numbers both look relatively strong, with revenue rising 15.7 percent to 604 billion ($96 billion) and profit up 28 percent to 47.5 billion yuan. (company announcement) The profit figure was especially impressive, since the company had posted flat profit growth the previous year.

Huawei’s older telecoms equipment business accounted for about 60 percent of its sales last year, with the bulk of that going to big carriers. Its consumer business accounted for about 40 percent, up by a healthy amount from 35 percent a year earlier, as it tries to diversify its product offerings.

Demand at Home

But the most revealing part of the report comes from the regional breakdown, which shows that China accounted for just over half of the company’s sales. What’s more, China sales were up 29 percent, easily beating out the growth rate for every other region in the world. After China, the next highest growth rate was 10 percent for Asia, while Europe, the Middle East and Africa grew just 5 percent and the Americas actually fell 10 percent.

All this goes to show one of the big themes of any China global expansion story, namely that Chinese companies generally enjoy big advantages in their home market that they don’t necessarily get elsewhere. In the case of telecoms equipment, the company is clearly being favored by Beijing, which is probably ordering the three big state-run telcos to buy mostly Huawei and ZTE equipment. The smartphone surge in its home market is more commercial, since consumers have plenty of other choices, including Apple and Samsung (Seoul: 005930) phones.

Since Huawei isn’t a publicly traded company any projections I make won’t really mean that much to investors. But with 5G coming down the pipeline and China making every indication it wants to be at the forefront of the technology, we can probably expect both Huawei and ZTE to see strong sales growth in the next five years from domestic demand for their networking equipment. Smartphones could be a more difficult climb, as Huawei is facing stiff competition at home and history has shown that it’s extremely hard for a company to stay on top for more than a year or two.