Ericsson (ERIC US) topped consensus with 3Q19 earnings and raised FY20E revenue guidance by 9%, given stronger-than-expected 5G demand. Mgmt noted that the global 5G market ramped earlier than expected, and they anticipated large China 5G deployment to start in 2020E, while the competition would be tougher than US market. We believe Ericsson’s results suggested 1) global accelerated 5G deployment and 2) share gains of Chinese vendors, such as ZTE (763 HK), and we expect the supply chain, such as SCC (002916 CH) and WUS (002463 CH) to continue to benefit from robust domestic 5G demand.
- 3Q19 beat along with guidance lift. Adj. operating profit grew 71% YoY, 23% above consensus, while revenue decreased 6% YoY, in line with market expectation. Networks segment (69% of sales) grew 9% YoY with GPM at 42%. By region, North America grew 28% YoY backed by strong 4G/5G demand; Northeast Asia increased 5% YoY on strong Korea 5G demand offset by China’s 4G slowdown; Europe and Latin America dropped 5% YoY. The company guided FY20E revenue of SEK230-240bn (previously SEK210-220bn) with OPM unchanged at >10%.
- Chinese vendors outperformed global peers; Bullish on China 4Q19E demand. Huawei’s 27% total sales growth in 3Q19 and ZTE’s 28% YoY sales growth consensus in 2H19E seemed more aggressive, compared with 2% YoY FY19E global RAN equipment market growth forecasted by Dell’Oro, and Ericsson’s 4% YoY growth in networks segment adjusted for FX. Going forward, we believe Chinese vendors’ global share gains will continue, backed by robust demand and earlier deployment in China. As CU has deployed 28K 5G BTS by mid Oct, considering CU’s 50K 5G BTS target for FY19E, we believe domestic 5G deployment will accelerate in 4Q19E. Meanwhile, we think global peers can hardly expand presence in China 5G market, given carriers’ various customized equipment requirements under “Co-build, co-share” framework. Hence, we are bullish on ZTE (763 HK) and component players, like SCC (002916 CH).
- Europe to embrace 5G in 2020E. Ericsson’s results suggested that current European markets haven’t stepped into 5G large-scale construction phase. However, we think Huawei brushed US sanctions with continued strong growth in European markets. It now has signed 60 commercial 5G contracts with half from Europe. We believe Europe 5G demand will surge since FY20E and some particular markets (e.g. Spain, Germany and Italy) will drive Chinese vendors’ steady growth in overseas segment.
- China 5G tariff rollout as near-term catalyst. We expect sector re-rating to continue driven by 5G tariff rollout and 5G deployment acceleration. Bullish on ZTE and component names, like SCC and WUS (002463 CH).
