Huawei – Nowhere to run pt. XXII

Finally, the cupboard is bare.

• Huawei reported a difficult Q3 2020 results as management has finally run out of countermeasures and must now face the hit that the US sanctions are having on its business.
• 9-month 2020 revenues were RMB671.3bn up 9.9% YoY but when one strips out H1 2020, revenues in Q3 2020 grew by just 3.7% which could be the beginning of a sharp downtrend.
• To be fair to Huawei, its management has done a superlative job at holding out in some of the most trying circumstances and has enjoyed great support from the home market.
• Unfortunately, China is running out of steam and is widely expected to have declined meaningfully in Q3 2020, taking much of Huawei’s support with it.
• Thanks to the roll-out of a new mobile standard, 5G, Huawei has been able to offset weakness in smartphones with infrastructure sales, but this too is coming under pressure.
• Ericsson was able to generate 7% YoY growth and cited China 5G as a major reason for its growth in Q3 2020.
• This means that the home market for infrastructure most likely really helped Huawei this quarter given that its 5G solution is currently the best available.
• However, from here things get very difficult
• Huawei recently launched its new flagship, the Mate 40, and quietly admitted that this might be the last one it does.
• In a surprisingly frank admission, Richard Yu, Consumer division head, said: “This year may be the end of the Huawei Kirin high-end chipset, the last generation”.
• This is because it can no longer have its chip designs manufactured in TSMC’s fabs and the fabs that it can use are unable to manufacture at 7nm which is the process that the Kirin980 uses.
• The latest clampdown also means that it will not be able to buy chips from Qualcomm or MediaTek or move Kirin production to Samsung, Global Foundries or any of the other foundries.
• Consequently, with Huawei unable to produce technologically competitive handsets, it may start to suffer precipitous market share losses in its home market.
• Furthermore, Huawei faces being squeezed out of 5G radio and core networks outside of China due to increasing security concerns surrounding Huawei’s links to the Chinese government.
• Its infrastructure business could also encounter problems sourcing components as radio base stations typically use FPGAs (programable chips) where 100% of the world supply is from the USA.
• Hence, the outlook for Huawei is very uncertain and a possible break up of the company and/or sale of some divisions could be possible.
• Samsung is already capitalising on Huawei’s woes in handsets, but it looks very much as if there could also be rich pickings for both Nokia and Ericsson should the tension between the USA and China remain.
• I think that this is very likely as one of the few things that both sides of the US Congress agree on is that China’s rise must be contained.
• Hence, a pretty hawkish stance is likely to be maintained whoever wins the coming election meaning that if no licenses are issued, it is not inconceivable that Huawei goes out of business entirely.
• The consensus seems to be that Huawei has enough stock of silicon to last it until early 2021 setting up a difficult 2020 in terms of revenues and a catastrophe in 2021.
• I think Nokia stands to be the biggest beneficiary.
• This is because Nokia’s own internal issues have prevented it from enjoying a recovery (like Ericsson) meaning that there is a lot of upside if the new management executes on its promises.
• I like Nokia and am inclined to take a position in it.