Image source @ Visual China
Text | Value Institute
On March 8, ZTE released its 2021 fiscal year annual report, comprehensively showing its operating conditions. In the past year, Whether in the domestic or international market, ZTE's business has made many breakthroughs. Judging from the core financial data, its total revenue, net profit and operating cash flow have reached the best level in history.
ZTE said in its earnings report that in combination with the actual operating conditions of last year, it will distribute a dividend of 3 yuan per 10 shares to all shareholders. According to the data, since falling to the bottom in 2016, ZTE's annual dividend rate has rebounded significantly in the past few years, with a total cash distribution of more than 7.1 billion yuan since its listing, indicating that its operating conditions are continuing to improve.
But in addition to the shareholder revelry, ZTE must also face up to the challenges ahead: the uncertainty caused by the tightening of the supply chain and external sanctions, as well as the increasingly fierce market competition, will lead to an increase in operational risks.
In the next few years, finding a second growth curve will be the most important task for ZTE.
Revenue and profit have doubled, and cost is a big problem
From the overall data point of view, although the report card handed over by ZTE is not amazing, it has not disappointed the market too much. After the opening of the market on Wednesday, ZTE Hong Kong stock prices opened high and went high, closing up more than 2%; A shares were close to flat opening, but unfortunately, they were affected by the large market that had been lower for several days.
The Value Institute believes that ZTE's performance in a number of key indicators such as revenue, profit and cost expenditure is relatively stable, which is conducive to consolidating investor confidence.
1, revenue: the growth rate remains stable
First look at the revenue performance, in general, ZTE has highlighted a stable word in the past few years.
According to the data, ZTE achieved revenue of 114.52 billion yuan in 2021, an increase of 12.8% year-on-year. Although this growth rate is not outstanding, but in connection with the sanctions pressure it has endured in the past few years, ZTE has done a very good job. According to the subdivision data, ZTE's domestic and international business achieved double growth, with revenue recording 78.07 billion and 36.45 billion yuan respectively, and the growth rate of the domestic market was better, with revenue increasing by 14.7% year-on-year.
In addition, if you stretch the timeline, you can find that ZTE has survived the most difficult period. According to the financial report data of previous years, ZTE's revenue has exceeded the 100 billion mark in 2017, but in the following two years, it recorded 85.5 billion and 90.7 billion yuan respectively, showing a small decline. The reason for the decline in revenue during this period, I believe it is needless to say that everyone knows it. Fortunately, in the past two years, ZTE's performance has rebounded and returned to the 100 billion mark.
What supports the recovery of ZTE's performance is undoubtedly the booming tide of 5G infrastructure that began to flourish in 2019. According to the data disclosed by the Ministry of Industry and Information Technology, during the period of 2019-2021, the number of 5G base stations built and opened each year in the country was 130,000, 718,000 and 1.425 million, respectively. ZTE, which seized the 5G infrastructure boom, also got out of the predicament as desired.
2, profit: net profit hit a new high, gross profit is less than market expectations
Compared with the steady recovery of revenue, ZTE's performance on the profit side can be said to be mixed.
On the one hand, its net profit continued to grow, setting a record for the best in history. The latest financial report shows that in the 2021 fiscal year, ZTE's net profit attributable to the mother was 6.81 billion, an increase of nearly 60% year-on-year; the net profit after deduction of non-attributable to the mother recorded 3.31 billion, an increase of a staggering 219.2% year-on-year.
But on the other hand, the growth of its gross margin is not so good. The data shows that among the three main businesses of ZTE, the gross profit margin of operators' network business increased by 8.7 percentage points year-on-year to 42.5%, which is basically in line with market expectations. However, the gross profit margin of the consumer business and the government and enterprise service business was only 18.2% and 27.1% respectively, a year-on-year contraction of 5.4% and 1.8%, both of which fell short of market expectations.
Compared with the previous fiscal year, ZTE's gross margin performance is indeed somewhat disappointing. According to the data, the gross profit margin of ZTE's consumer business increased by 5.4 percentage points year-on-year in 2020, and the gross profit of the international market business reached the best level in history.
For this result, some capital predators are also not very satisfied. Shortly after ZTE released its earnings report, Nomura, Japan's largest brokerage, released a research report saying that ZTE's overall performance was worse than the bank's expectations. However, considering its stable revenue performance, it still maintains its buy rating and target price of HK$32 for ZTE.
In the view of the Value Institute, revenue growth and gross profit decline occur at the same time, which can only point to one reason: runaway costs.
The data shows that ZTE's cost growth in the consumer business is the fastest, with a year-on-year increase of 70.41%, far exceeding the revenue growth of 59.22%. Under the dual challenges of tight supply chain and rising upstream and downstream raw material costs, the cost pressure of ZTE in the future is likely to continue to rise.
(Picture from ZTE earnings report)
From a deeper perspective, the rising cost pressure of ZTE has a lot to do with the revenue structure: the dependence on 5G-related business is too high, the consumer business investment is quite large, and the growth rate is acceptable, but the revenue scale is not ideal.
In the case of global 5G infrastructure, ZTE can naturally benefit from it. However, relying on a single service to support long-term development is not stable after all, and in the face of an increasingly fierce market competition environment - especially the step-by-step pressure of the old rival Huawei, the growth pressure of ZTE operators' network services is also increasing.
Benchmarking Huawei, ZTE's disadvantages are still obvious
In terms of revenue structure, ZTE's current number one revenue pillar is the operator network business, with revenue reaching 75.71 billion yuan in 2021, accounting for about 66% of revenue. In contrast, the specific revenue scale and revenue proportion of consumer business and government and enterprise affairs are much inferior.
ZTE's consumer business mainly includes two parts: smartphones and mobile Internet products, with the former accounting for a higher proportion. But from the past few years, the performance of its smartphone business has been disappointing.
At present, in addition to ZTE mobile phones, the group also has two sub-brands, Nubia, which is positioned young, and Red Devil, which locates game mobile phones. However, these three brands did not play a synergistic advantage, each developed independently, and all encountered strong enemies to encircle and suppress.
According to IDC data, since 2020, ZTE smartphone market share in the Chinese market hovered around 1.5%-2%, compared with huami OV four major domestic brands a huge gap. As for the Red Devils mobile phone, which has high hopes, it is also encountering serious challenges. At the beginning of this year, Tencent was exposed to spend 2.7 billion yuan to acquire Black Shark game mobile phones, a move that may reshape the industry pattern.
What is more noteworthy is that, as mentioned earlier, the amount of money ZTE has spent on consumer business in the past year is very large. Signing Wu Jing as an image spokesperson in the middle of the year and building an offline distribution network reflect ZTE's ambitions for the mobile phone business. According to the data, ZTE has built nearly 7,000 retail positions in 2021, and its goal is to expand this scale to 10,000 homes in 2022.
The cost is constantly growing, but the scale and proportion of revenue have not kept up, and ZTE's inner anxiety can be imagined.
Of course, from the perspective of the continuous growth of total revenue and net profit, the operator network business can still provide ZTE with a steady stream of revenue.
ZTE's operator network business mainly comes from the construction of communication facilities related to 5G infrastructure. In the past few years, the development of 5G infrastructure projects in the mainland has been very rapid, but the gap is still obvious. According to public information, according to the planning of relevant departments, the number of 5G base stations in mainland China will reach more than 3.64 million by 2025, and the goal is to achieve 26 5G base stations per 10,000 people.
In the field of 5G infrastructure, ZTE is well recognized by customers. According to the information reviewed by the Value Research Institute, the first quarter of 2022 has not yet passed, and ZTE has successively won orders of up to 10 billion yuan for China Unicom's 10G/100G equipment collection, cloud server collection and procurement, and China Telecom's equipment collection and procurement.
But the problem is that the future of operators' network business will not always be smooth – competition in the 5G infrastructure market will become more brutal, and ZTE's own revenue growth rate has declined visibly.
ZTE's challenges in operator network business are inseparable from a familiar name - Huawei.
Some time ago, a set of strongly contrasting data was popular on social media: in 2011, Huawei and ZTE's revenue was 203.9 billion and 86.3 billion, respectively, a difference of more than double; in 2021, the revenue of the two companies was 891.4 billion and 114.5 billion, respectively, and the gap widened to nearly eight times.
From half Huawei to one in eight Huawei, ZTE has stagnated in growth over the past decade, being left far behind by this old rival. For a long time to come, the two will continue to compete fiercely in the field of 5G infrastructure, under the all-round comparison, what are the chances of ZTE winning?
In the view of the Institute of Values, the situation is not optimistic.
According to a report released by Gartner, Huawei, Ericsson and Nokia are currently the three most powerful companies in the global 5G network infrastructure field, and they are far ahead in both execution ability and market competitiveness. ZTE was described in Gartner's report as competitive, but under-executed.
The gap between the two is also reflected in the market share. According to Dell'Oro Group statistics, Huawei has occupied nearly 30% of the global 5G communication network equipment market share since 2018, and its market share is still increasing. ZTE's market share in 2020 is about 10%, only one-third of Huawei's, ranking fourth in the world, and is overpowered by Nokia and Ericsson.
(Image from Prospective Industry Research Institute)
In fact, the bottleneck of ZTE operators' network services has loomed. According to the financial report data, the revenue of ZTE operators in the 2021 fiscal year-on-year increased by 2.29% year-on-year, and the increase was quite limited. In the period of 2017-2020, its growth rate was 8.32%, 10.51%, 16.66% and 11.16%, respectively, which was better than last year.
It should be noted that in the past few years, the revenue share of operators' business has remained high, reaching 77% at one point. The Value Institute believes that in the context of the decline in business revenue growth, ZTE continues to rely on the operator's network strategy business to fight the country is not safe, and it is important to take precautions.
The second growth point of power: IT, digital energy, terminal business who will carry the banner?
ZTE is also well aware that it cannot make money from the operator's network business alone, so it has been actively looking for a second growth curve in the past few years. Consumer businesses, led by smartphones, were once highly anticipated, but the road proved to be not easy.
So in the future, who will rely on ZTE's second growth curve to support?
There are three most popular options at the moment: IT services, digital energy, and home terminals.
Home Terminals: The Internet of Everything is an opportunity
In ZTE's current business structure, the home terminal business and the smartphone business are divided into consumer business segments together, but the development prospects of these two businesses are not the same. The Value Institute believes that thanks to the shareholder wind of the Internet of Everything, ZTE's mobile computer terminals, home information terminals and Internet of Things devices and other businesses have better breakthrough opportunities than smart phones.
The report of the China Commercial Industry Research Institute also pointed out that the home information terminal equipment market will maintain an average annual compound growth rate of about 30% during 2020-2025, and the overall growth rate is quite considerable. Among them, the sales and penetration rate of equipment such as smart home control centers and digital TV set-top boxes are expected to usher in continuous growth.
At the online media exchange meeting at the beginning of this year, Ni Fei, senior vice president of ZTE and president of the terminal business unit, revealed a set of data: by the end of 2021, ZTE's share of the global CPE (customer terminal equipment) market ranked first, and last year's annual shipments exceeded 100 million, but this is only the first step. According to ZTE's plan, its terminal business will follow the "1+2+N" strategy in the future, create intelligent interconnection scenarios, and launch more related products.
Last week, ZTE just launched the world's first WiFi 7 standard 5G CPE at MWC, focusing on 5G high speed and WiFi 7 high concurrency technology. In the future, with the further enrichment of the terminal product library, the development of ZTE-related businesses is also expected to accelerate.
IT business: grasp the two cores of storage and server
Wang Xiang, chief strategy officer of ZTE, once said that the group's IT business has an important advantage:
"ZTE has basic advantages in chips, software, operating systems, databases and other fields, and its future goal is to quickly increase revenue to the level of tens of billions."
Combined with ZTE's research and development advantages in hardware, the two key products of storage and server are particularly worth looking forward to. According to the statistics of the Value Research Institute, ZTE's IT business is currently mainly oriented to the B-end, that is, the government and enterprise service sector, and the cooperative customers are all over the fields of education, transportation, infrastructure and so on.
In the past two years, behind key projects such as the fully automatic operation line system of Taiyuan Rail Transit Group, the cloud desktop system promoted by the Ministry of Education, and the construction of Zhuhai smart city, ZTE IT equipment/services have been present.
However, from the current revenue ratio of only about 11%, the growth space of government and enterprise services is still very large, and ZTE also needs to develop more B-end resources - the automotive industry, which is the number one goal of ZTE.
According to the data, the automotive electronics business team established by ZTE in March last year is fully involved in the intelligent car solutions and hardware supply market. It is reported that ZTE has established cooperative relations with FAW and SAIC, two major leading car companies, to provide the latter with automotive operating systems and basic platform software products.
Digital Energy: Integration with 5G is key
As for the digital energy business that started the latest and has the shortest development time, ZTE may have missed the first-mover advantage.
The Value Institute noted that ZTE laid out photovoltaic, base station new energy and other businesses as early as 2002, but since then it has not invested more resources, and the entire business is also in a tepid state.
In the same period, Huawei has been aggressively attacking the digital energy market, and the two sides have gradually opened up the gap. Among them, key projects such as the 6MW rooftop distributed photovoltaic power generation at the Xiong'an Station of the Beijing-Xiongxiong Intercity Railway and the charging station of the taxi storage yard in The Second Terminal of Shanghai Hongqiao Airport have all been won by Huawei.
However, the "late" ZTE is not without the opportunity to overtake in curves - the combination with 5G is its "secret weapon".
Official data shows that nearly 450,000 5G sites around the world are using 5G power devices in large-scale applications. The market share and customer resources reserved in the field of 5G infrastructure are all important foundations for ZTE to develop digital energy business in the future.
For ZTE, the most important thing now is to consolidate technical strength, especially to narrow the gap between it and Huawei. According to Wisdom Bud data, Huawei has accumulated a large number of technical patents in the field of digital energy, with more than 600 patents in the field of photovoltaic and energy storage alone, far exceeding other competitors.
The report of the future think tank shows that the scale of China's digital economy industry is still expanding, with a year-on-year growth rate of more than 30% since 2017. The broad market prospects have left ZTE with time and space to catch up with Huawei, and the key is to see if the former can seize this opportunity.
Write at the end
In ZTE's planning, 2021 is the final year of its strategic development period, and it is also a critical period for achieving digital transformation and expanding business boundaries. Judging from the data revealed in the financial report, ZTE's performance in the past year cannot be said to be perfect, but it has been quite good.
Looking back at the development process of ZTE in the past few years, in fact, it has never been smooth. In 2018, the first overseas 5G commercial contract was won, and the british Channel Islands, which had a population of 164,000, was not even large enough to be a large community in Beijing. However, after these years of development, ZTE's 5G infrastructure business has made great progress, growing into the second pole outside huawei in the domestic market.
Today, the development of its new business is in a critical period, and the difficulties encountered will not be less than the original 5G infrastructure business, but we should still hope for ZTE. Digital energy, home terminal related markets in the next few years have great promise, now it is up to ZTE to come up with its core competitiveness, as soon as possible to seize more market share.