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Huawei Who? Winners and Losers of the Blacklisting

December 12, 2018

Huawei might not be a household name in the US, but not much works in the global wireless market without this Shenzhen-based privately held company and its vital products. It makes equipment and components for networks as well as for handsets, including its own branded products.

But as with its cross-town peer, ZTE (ZTCOY), it has been caught up in this anti-China mania in the US and other markets. There is a move to restrict its products from sale and use in the US, which may take a bite out of the huge successes of this impressive company.

And to stick it further to the company and its founder, Ren Zhengfei, his daughter, Meng Wanzhou (also known as Sabrina Meng), was arrested in Vancouver, Canada, on order from the US District Court for the Eastern District of New York, which is demanding that she be eventually extradited for crimes not yet formally declared. Thankfully, Canadian authorities have just granted bail as she awaits potential extradition to the US.

This puts Huawei in a pickle, of course. But it also puts telecom companies in another mess, since there are few non-Chinese companies with the technology and products needed for networking, including the rollout of the fifth generation (5G) standard for wireless. This means that companies including AT&T (T), Sprint (S) and Sprint’s largest controlling shareholder Softbank (SFTBY) are facing trouble as they might well be the losers from Huawei’s challenges.

Setting aside the politics and market risks from this and other actions (including the detention of an ex-Canadian diplomat, Michael Kovrig, working for International Crisis Group in China without a required visa), there are some market opportunities in the network equipment space.

One of the telecom companies that might be a winner is Verizon (VZ). I’ve been writing about how Verizon continues to work with Ericsson (ERIC) on its 5G network buildout. The current Verizon CEO, Hans Vestberg, came from Ericsson. I see this company continuing to be a beneficiary of 5G as well as the political challenges of Huawei.

In light of this and Huawei’s troubles, I see Ericsson as a big winner. No, the company isn’t without its faults, as last week saw some networks in Europe and Japan using Ericsson products experience temporary blackouts due to a silly error by software engineers. But I think we’re going to see the company’s strengths play themselves out in big ways in the coming months.

Another company that I’ve followed for decades and have recommended to investors in the past is also a strong player in the equipment and component business for wireless. Samsung Electronics (SSNLF) is a massive South Korea-based company that has its products inside nearly every bit of electronic kit around the globe making for a very viable alternative for global telecoms for equipment.

Samsung has its eyes on expanding its wireless equipment business, and recently replaced its division head to move things along. And moving things along has always been one of the company’s strong points. Revenues for this juggernaut continue to climb by a trailing rate of 18.70%. Operating margins are fat at 22.40%, and it delivers to shareholders with a current return on equity of 19.10%. It has gobs of cash and nearly no debt.

The stock is valued at a mere 1 times its book and 1 times its trailing sales! And over the past 20 years, the shares have delivered a return of 3,699.23% for an annual equivalent return of 19.93% in US dollar terms.

There is a catch.

The stock is difficult to buy in the US market. Ordinary shares are traded in the over-the-counter market under the symbol SSNLF with an ISIN identification number of KR7005930003. The current price should work out in US dollars at $35.84. And note, many of the free online quote websites have not been updating prices and not reflecting the share split of the underlying stock by 50 for 1 on May 4, 2018.

Brokerages can get this done, but you may need to phone them and may need to pay higher commission rates.

And a couple of other companies of note that may gain on Huawei’s woes are worth looking at right now. First is the cross-town rival to Samsung in LG Electronics (LGEIY), which is also in the handset market in the US and around the globe.

Second is Blackberry Limited (BB). This isn’t the company that you think it is anymore. Gone are the classic and even iconic handsets that I depended upon for many years. Instead, Blackberry provides enterprise software for communications and data transmission as well as providing the underlying software that is behind much of the recent advances in automotive technology, including self-driving cars.

It still does license its handset software to TCL Electronics Holdings (TCLHF), which makes secure Blackberry smartphones like the one I now use. But the key is the data security for wireless devices. The company’s software locks down networks that would solve for most alleged dalliances by Huawei’s equipment.