Chinese telecom equipment and smartphone manufacturer beats out domestic rival ZTE

It was a rocky week for one of China's top two smartphone and telecom equipment OEMs and an optimistic one for the other.  ZTE Corp. (SHE:000063) on Sunday reported that it would likely lose 2.9B yuan ($466.2M USD) for 2012.  ZTE is China's second largest telecommunications equipment maker.

The news was quite different for Huawei Technologies Comp. (SHE:002502), however.  Huawei posted a 2012 profit of 15.4B yuan ($2.48B), in line with its guidance, on revenue of 220.9B yuan ($35.5B USD).  The recovery, as promised, from a "slow" 2011 in which Huawei "only" pocketed 11.6B yuan ($1.86B USD) cheered analysts.

I. U.S. Scrutiny Won't Stop Our Growth, Huawei Says

Jessie Yu, an analyst with Frost & Sullivan told Reuters, "Huawei has a better long-term outlook (than ZTE) because it has telecom equipment, enterprise and handsets business.  Its handsets are doing quite well and it has maintained its telecom equipment share. There is also some pickup in its enterprise business, so overall, its revenue channels are wider than ZTE."

Huawei Chief Financial Officer Cathy Meng addressed recent U.S. security scrutiny in her company's earnings conference.  Ms. Meng is the daughter of former People's Liberation Army (PLA) officer and current Huawei CEO Ren Zhengfei, who founded the company almost two and a half decades ago.  In her talk she said that U.S. accusations that Huawei illegally resold electronics from American OEMs to Iran would not hamper the Chinese giant's growth.

Huawei has blamed the sales on a miscreant partner, an approach that it has used to escape fines or prosecution in the U.S. in the past.  Huawei's rival ZTE is facing similar allegations.  China and Iran are close trade partners, however, it is illegal for the Chinese companies to resell American electronics to Iran, creating an awkward arrangement.

Huawei CFO
Huawei CFO Cathy Meng [Image Source: Huawei]

Comments Ms. Meng regarding the accusations, "We feel that security concerns in the United States are restricted within the country and that won't have an impact on strategic decisions made by other countries.  Over the past 20 years, we have not had any incidents based on security issues."

While Huawei has been banned on bidding on certain government networking contracts in the U.S. and Australia due to spying concerns (given the company's close ties with China's PLA), Huawei is a top seller of telecommunications equipment throughout most of Asia, Africa, and Europe.

II. Company Predicts Big Growth in 2013

Ms. Meng said she expects bright growth for Huawei, remarking, "Cloud computing is a huge sector in the next five years. In the telecom industry, we are expecting a 5 percent increase in capital investments. Smartphone penetration is still way too low and there is a lot of room for growth.  These three areas will create a lot of opportunities for us."

Currently Huawei is privately held, although there is a private share listing for employees.  The company's 64,000 employees partially own it.  There is much international interest in a possible public offering.  Rival ZTE is partially publicly held.  On that issue Ms. Meng would only say, "We've always kept an open mind when it comes to the listing issue."

Huawei offices
Analysts say a public offering of Huawei stock would require a lot of work, but could be an interesting proposition, given the company's bullish record.  [Image Source: AFP]

Huawei and ZTE have both posted bullish outlooks for 2013.

Huawei is currently the sixth largest seller of mobile phones (total sales of both feature phones and smartphones) worldwide.  It hopes to improve upon that position in 2013 and build its smartphone brand recognition in lucrative markets like Europe and the U.S.  Huawei is also looking to make a push into the tablet computer space, although that effort is still far more unproven.

Sources: Huawei, Reuters

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