Vertical Divider
2020 Huawei’ Results: OP Slightly Lower, Operating CF Downturn, Inventory
Huawei reported earnings for FY12/20. Sales grew 4% Y/Y to CNY891.4b, gross profit was up 1% to CNY327.1b (GPM 36.7%), OP contracted 7% to CNY72.5b (OPM 8.1%) and NP rose 3% to CNY64.6b (NPM 7.3%). OP declined despite growth in sales, and the GPM and OPM narrowed slightly. R&D costs increased 8% to CNY141.9b and R&D ratio rose from 15.3% in FY12/19 to 15.9%, as the company remained on the R&D offensive. Depreciation and amortization increased 28% to CNY33.1b while labor costs were down 1% to CNY166.1b.
consumer (mainly smartphone, TC, TV and smartwatch business) sales
advanced 3% to CNY482.9b. By region sales in:
The company’s main development bases for the consumer business are in Shanghai (P and Mate series), Beijing (mainly Honor and Nova) and Xi’an (low-end and ODM). We believe it has hived off and transferred the whole of the Beijing operation and around half of the Xi‘an operation to Honor, newly independent of the Huawei group, and transferred 4,000–5,000 personnel, thereby significantly reducing its financial burden. Our focus now is on what the company does about the personnel, consumer business and particularly the smartphone operation at its head office and the Shanghai and Xi’an bases. As things currently stand, Huawei remains on the US entity list and the limitations on the company’s ability to procure semiconductors means that it can effectively only manufacture and sell 4G and earlier generation smartphones (except for 5G smartphones utilizing its in- house Kirin AP). The US restrictions present little obstacle in the PC, tablet and TV businesses (assuming none of its products are 5G compatible). Huawei can resolve the situation only by overturning the US restrictions or by selling off the remaining smartphone business in the way it has already sold parts of it to Honor.
2021 smartphone shipments at forecast at 35m units although the company is targeting 45–50m, which seems unattainable in light of the shortage of APs and other semiconductors, as well as the US sanctions. High-end models (P and Mate series developed in Shanghai) should account for 5m–10m of the shipments with the remainder comprising low-end models (developed in Xi’an). If the company does spin off the smartphone business, new models could hit the market six months to a year after the spin-off. The company could realistically stage a comeback as a high-end brand with the launch of flagship models equivalent to the P60 and Mate 60 sometime after the start of 2022 and are keeping a close eye on developments. The company has retained (not experienced an exodus of) the personnel it needs, particularly for product development. It appears that the workforce has not lost its faith in Huawei or its current management.
The carrier business (particularly 5G infrastructure-related business), however, remains in a very tight spot, as we believe the US government is far less likely to soften its stance here than it is in the consumer business. The same applies to HiSilicon, which is crucial to this business. Inventory remained flat and raw material inventory increases at end-FY12/20 is due to an increase in semiconductors and other inventory used in carrier and enterprise products. Although the company probably has sufficient inventory to see it through 2021, medium term it is going to have to break out of the current situation by persuading the US to overturn its sanctions.
Source: Yasuo Nakane
Huawei reported earnings for FY12/20. Sales grew 4% Y/Y to CNY891.4b, gross profit was up 1% to CNY327.1b (GPM 36.7%), OP contracted 7% to CNY72.5b (OPM 8.1%) and NP rose 3% to CNY64.6b (NPM 7.3%). OP declined despite growth in sales, and the GPM and OPM narrowed slightly. R&D costs increased 8% to CNY141.9b and R&D ratio rose from 15.3% in FY12/19 to 15.9%, as the company remained on the R&D offensive. Depreciation and amortization increased 28% to CNY33.1b while labor costs were down 1% to CNY166.1b.
- Sales in the carrier segment (base stations, etc.) remained flat Y/Y at
consumer (mainly smartphone, TC, TV and smartwatch business) sales
advanced 3% to CNY482.9b. By region sales in:
- China grew by 15%, with sales contracting 12%
- EMEA region, contracted by 9%
- Americas contracted 6%
- Both 5G infrastructure-related and the consumer segment were buoyant in China, but European and Asian consumer sales slumped as access to the Google Mobile Service ecosystem was essentially cut off, although infrastructure business remained robust.
- Operating cash flow dropped 62% to CNY35.2b, investment cash flow was down 79% to CNY30.8b and free cash flow was CNY4.5b, The company maintains a healthy financial position, with abundant cash and deposits of CNY357.6b (-4%) and an equity ratio of 38% at end- FY12/20.
The company’s main development bases for the consumer business are in Shanghai (P and Mate series), Beijing (mainly Honor and Nova) and Xi’an (low-end and ODM). We believe it has hived off and transferred the whole of the Beijing operation and around half of the Xi‘an operation to Honor, newly independent of the Huawei group, and transferred 4,000–5,000 personnel, thereby significantly reducing its financial burden. Our focus now is on what the company does about the personnel, consumer business and particularly the smartphone operation at its head office and the Shanghai and Xi’an bases. As things currently stand, Huawei remains on the US entity list and the limitations on the company’s ability to procure semiconductors means that it can effectively only manufacture and sell 4G and earlier generation smartphones (except for 5G smartphones utilizing its in- house Kirin AP). The US restrictions present little obstacle in the PC, tablet and TV businesses (assuming none of its products are 5G compatible). Huawei can resolve the situation only by overturning the US restrictions or by selling off the remaining smartphone business in the way it has already sold parts of it to Honor.
2021 smartphone shipments at forecast at 35m units although the company is targeting 45–50m, which seems unattainable in light of the shortage of APs and other semiconductors, as well as the US sanctions. High-end models (P and Mate series developed in Shanghai) should account for 5m–10m of the shipments with the remainder comprising low-end models (developed in Xi’an). If the company does spin off the smartphone business, new models could hit the market six months to a year after the spin-off. The company could realistically stage a comeback as a high-end brand with the launch of flagship models equivalent to the P60 and Mate 60 sometime after the start of 2022 and are keeping a close eye on developments. The company has retained (not experienced an exodus of) the personnel it needs, particularly for product development. It appears that the workforce has not lost its faith in Huawei or its current management.
The carrier business (particularly 5G infrastructure-related business), however, remains in a very tight spot, as we believe the US government is far less likely to soften its stance here than it is in the consumer business. The same applies to HiSilicon, which is crucial to this business. Inventory remained flat and raw material inventory increases at end-FY12/20 is due to an increase in semiconductors and other inventory used in carrier and enterprise products. Although the company probably has sufficient inventory to see it through 2021, medium term it is going to have to break out of the current situation by persuading the US to overturn its sanctions.
Source: Yasuo Nakane
|
Contact Us
|
Barry Young
|