ZTE Doubles Profit but Falls Further Behind Huawei

ZTE is used to playing second fiddle to Huawei, the much bigger of China’s two telecoms equipment makers, and its latest results show the revenue gap between the two vendors continues to widen.

ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) managed an 8% year-on-year increase in sales in 2014, to 81.24 billion Chinese Yuan ($13.1 billion), a very creditable performance. But it lags far behind the roughly 20% rise in 2014 revenues that Huawei Technologies Co. Ltd. reported last week. Both sets of results are yet to get the official nod from auditors, it should be noted. (See Huawei Puts Its Rivals to Shame.)

Although the 2014 result marks a return to annual revenue growth for ZTE, which flagged year-on-year sales declines in 2012 and 2013, the vendor was still about CNY5 billion ($804 million) short of its revenue high point of 2011.

Investors had clearly been hoping for a better performance from ZTE, as the company’s share price dipped by 2.63% on the Hang Seng Index on January 19, the day of the unaudited results announcement.

That was despite a major improvement in the bottom line. ZTE not only swung to an operating profit of CNY105 million ($16.9 million), from a loss of CNY1.49 billion ($240 million) in 2013, but also managed to nearly double its net profits to CNY2.64 billion ($424 million).

Similar to Huawei, ZTE attributed revenue growth to the success of its international smartphone business as well as sales of 4G equipment in China.

Operators China Mobile Ltd. (NYSE: CHL), China Unicom Ltd. (NYSE: CHU) and China Telecom Corp. Ltd. (NYSE: CHA) have been racing to extend 4G networks using the LTE FDD and LTE TDD standards. Last week, ZTE was one of five equipment vendors that China Telecom selected to provide LTE FDD equipment during the second phase of its deployment of a “hybrid” 4G network that relies on both FDD and TDD technologies. (See China Telecom Names Five LTE FDD Suppliers.)

ZTE also claims to have made good progress on slashing expenses, largely by reducing its exposure to foreign currency and the volatility this often entails.

Despite all these efforts, however, its operating profit margin came in at a paltry 0.1% in 2014, compared with the 12% that Huawei managed.

Even Western rivals such as Alcatel-Lucent (NYSE: ALU) and Ericsson AB (Nasdaq: ERIC) look more profitable on that basis. Still to provide details of full-year results, Alcatel-Lucent registered an operating profit margin of 3.6% over the first nine months of 2014, while Ericsson’s was 6.6% over the same period.