SMARTPHONES: ZTE Ties With Suning, Eyes Big Growth

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Bottom line: ZTE’s new Suning tie-up presages an aggressive push into the China smartphone market this year, potentially helping it reach an aggressive target for 20 percent annual revenue growth over the next 5 years.

Suning buys into Nubia

Following a painful restructuring that wrapped up more than a year ago, telecoms stalwart ZTE (HKEx: 763; Shenzhen: 0000063) is heading into the New Year with a major new partnership with retailing giant Suning (Shenzhen: 000063), and a medium-term revenue target that looks quite aggressive. The signals reflect a new level of confidence at ZTE, which has returned to the profit column and is aggressively building up its smartphone business as a key plank for its future growth.

The smartphone business lies at the heart of the new tie up with Suning, which is buying a major stake in ZTE’s separately-run upscale Nubia brand. The bigger picture has a top ZTE official forecasting the company’s revenue will hit 200 billion yuan ($31 billion) by 2020, a 150 percent increase over 2014 levels.

ZTE rose to prominence more than a decade ago, when it and crosstown rival Huawei burst onto the global stage as 2 of China’s first major exporters of high-tech products, in this case networking equipment that powers the world’s wired and wireless networks. While Huawei was the elder brother, penetrating major western markets like Britain and Germany, ZTE found success selling its cheaper products to developing markets in regions like Eastern Europe, the Middle East and Africa.

But then ZTE hit a major roadblock starting around 2010, and saw its sales stumble and profits erode as the global telecoms equipment market slowed. It ultimately sunk into the red and sold off several major assets as part of a retrenchment, and has emerged since then as a leaner company that returned to profitability last year.

With that painful chapter now in the past, ZTE has been aggressively expanding its smartphone unit to complement its older, slower-growth networking equipment business. Under its newest alliance on the smartphone front, ZTE will sell a third of its Nubia unit to Suning for 1.93 billion yuan, or about $300 million. (English article; Chinese article)

ZTE will hold 60 percent of Nubia, with the remainder held by a third-party investor. The deal values Nubia at about $1 billion. Since Nubia accounts for about one-sixth of ZTE’s smartphone sales, that would mean the company’s total smartphone business would be worth about $6 billion, or roughly half of ZTE’s current market value of nearly $12 billion.

Push Into China?

This latest deal appears to signal that Nubia could soon make a major push into the crowded China market, since Suning is one of the nation’s largest electronics retailers and could strongly promote the brand. ZTE has generally been conservative in China due to the market’s ultra competitive nature. But perhaps this new tie-up signals it intends to become more aggressive in 2016, as many so-called smartphone pure-plays like OnePlus and Smartisan reportedly are running into trouble. (previous post)

Next there’s the bigger picture news that has CEO Shi Lirong announcing ZTE’s annual revenue target of 200 billion by 2020 at a year-end company event. (Chinese article) That would translate to annual growth of nearly 20 percent, a big jump from the 8 percent growth ZTE posted in 2014, and the 16 percent growth it recorded in the first 3 quarters of last year. Smartphones will undoubtedly be a big part of the growth story, posing some risks but also some big potential rewards due to the market’s volatile nature.

I was once quite bullish on ZTE when it first began to globalize around a decade ago. Other investors felt the same way, and the company’s shares more than doubled during the boom times between 2006 and 2010. At their current levels the shares now trade at about half the level of their all-time high from 2009, and also trade at a relatively reasonable price-to-earnings multiple. That means we could see some significant upside for the stock if the company grows on track with its 2020 revenue target, a possibility that looks challenging but certainly not impossible based on recent trends.

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