Huawei 2019 – The lighthouse and the iceberg.

2020 likely to be a very difficult year. 

• Huawei has done an excellent job of weathering the storm in 2019 but the tidal wave in 2020 is likely to overwhelm any growth prospects that the company might have otherwise had.
• Huawei has released its 2019 annual report where the cover very appropriately depicts a lighthouse withstanding a severe battering from the sea.
• Following this theme to its logical conclusion would lead me to expect to see a large iceberg on the cover of the 2020 annual report.
• Huawei reported 2019 revenues / EBIT of RMB859bn ($123bn) / RMB77.8bn ($11.1bn) with operating margins of 9.1%.
• This represented revenue growth of 19% in revenues and 6% in EBIT as margins fell by 900bp during the period.
• Given the challenges that Huawei faced in its consumer products business during the year, this is a superb achievement.
• Faced with almost complete loss of 50% of its smartphone business, the company still managed to post 34% YoY revenue growth in its consumer business largely stoked by patriotic buying of Huawei products in the home market as shipments collapsed overseas.
• There is very little doubt that Huawei makes some of the best smartphones available and its latest release the p40 Pro+ has by far the best camera system of any device available today according to DXOMARK.
• However, without the Google services that almost everyone outside of China uses on a daily basis, hardly anyone is going to buy a Huawei smartphone.
• Hence in 2020 with foreign shipments dwindling to zero and market share under pressure at home, shipments are likely to materially decline.
• Furthermore, Huawei’s close ties to the CCP could also put its infrastructure business under pressure going forward.
• The COVID-19 pandemic has caused untold damage to Western economies and once the crisis has passed the inevitable blame game will begin.
• Most fingers will point directly at the CCP which could have been more transparent much earlier with regard to the seriousness of the outbreak and done much more to confine the virus to the Chinese mainland.
• Virus models indicate that had the CCP closed all of its airports and borders and informed the world of the issue it was facing several weeks earlier, the outbreak could have been not much more serious than SARS in 2002-2003.
• Hence, I suspect that the willingness of Western economies to send business in Huawei’s direction will take a substantial hit moving them to be more in line with the hawkish stance of the USA.
• This could result in a significant loss of market share in Huawei’s infrastructure business sending more business in Nokia and Ericsson’s direction.
• A similar trend could also play out in the enterprise with the biggest beneficiary likely to be Cisco.
• However, at the same time Nokia, Ericsson and Cisco would be very likely to lose all of their Chinese business making a prediction of the manifestation of this trend very difficult.
• Regardless, the net benefit to these three would likely be much more positive than negative.
• Hence, while 2019 was a very good year for Huawei, 2020 is likely to be very challenging and there is potential for a significant shift in market share to the badly beaten up European and US telecom equipment sector.
• I am not rushing to buy these stocks because of the overall dreadful macroeconomic outlook, but there is a potential trend here to keep a very close eye on.