Every once in a while we would hear news about Trump introducing new bans on Chinese companies. But nothing beats attacks on his all time favourite – Huawei.
Even though I am a believer in the rise of China, I do not think the Chinese should complain about these bans because China has been more notorious for preventing foreign companies from entering the Chinese market. Examples are Google and Facebook. This allowed their domestic companies to benefit from the lack of competition and gave rise to many copycat versions to prosper in China. So the U.S. is just doing a tit-for-tat which is probably long due.
When it comes to world affairs, I always defer to Lee Kuan Yew’s views. He said,
“China knows that it needs access to U.S. markets, U.S. technology, opportunities for Chinese students to study in the U.S. and bring back to China new ideas about new frontiers. It therefore sees no profit in confronting the U.S. in the next 20 to 30 years in a way that could jeopardize these benefits.”
His words ring true today and this is why Trump’s technological export bans have been so effective – China is still reliant on US for some key technology such as chips.
Previously, the ban wasn’t comprehensive because Huawei could circumvent it, as explained in The Economist published on 30 Nov 2019,
“But Nvidia does not physically make anything in America. Instead it sends its designs, which are not themselves subject to the export controls, to the Taiwan Semiconductor Manufacturing Company, which undertakes the expensive, high-tech process of manufacturing the silicon. Under the law, that leaves Nvidia free to sell the resulting chips to Huawei.
Many other American companies share this offshore-manufacturing structure. It exists because Western technology firms have largely outsourced manufacturing and assembly to countries such as Taiwan, which have built up large, specialised industries around the task. Only the highest-margin design work is still undertaken at home. For Huawei, this counts as a happy accident.”
Similarly, Huawei designs its own chips via HiSilicon and contracts Taiwan Semiconductor Manufacturing Company (TSMC) (TWSE:2330) to manufacture them.
Hence, Huawei felt little to no pain in 2019 – life was usual except that the media-shy founder, Ren Zhengfei, had to step into the limelight and give his side of his story.
In May 2020, the Trump administration now requires chip makers who use American equipment to obtain a license from the US government before they are allowed to sell chips to Huawei.
TSMC uses American equipment in their manufacturing plants and falls under this rule. It announced that it has stopped taking orders from Huawei and that shipment will end in mid-Sep 2020.
This hurts Huawei. This problem will affect production of the high-end Kirin chips used in Huawei’s more expensive handsets such as the P and the Mate series.
How you may profit from the attacks on Huawei
Huawei is a private company and you can’t really short it even if you want to. So you would need a few indirect plays in this situation.
Invest in Alternative Chip Makers – SMIC and MediaTek
Huawei’s alternatives include Semiconductor Manufacturing International Corp (SMIC) (SEHK:981), MediaTek (TWSE:2454) and Unisoc. But their capabilities are nowhere near TSMC. Although they can make the low to mid-range chips, they are probably not capable of manufacturing the Kirin chips.
In fact, SMIC is facing a potential blacklisting by Trump administration.
But since Huawei is left with little choices, SMIC and MediaTek may still get more business at eventually. Hence, it might be worth digging into these two companies further.
Here are some quick comparisons between the SMIC and MediaTek.
|SMIC (SEHK:981)||MediaTek (TWSE:2454)|
|YTD Returns (4 Sep 2020)||+86%||+37%|
|Market Cap||US$41 billion||US$33 billion|
|Revenue||US$0.9 billion||US$2.1 billion|
|Revenue growth y-o-y||-6%||+3%|
Both stocks have seen strong gains this year and probably the market has expected them to solve Huawei’s needs. They aren’t cheap in my opinion but MediaTek is relatively less expensive than SMIC.
Given that the stock market has started to correct itself, there may be opportunities should the prices become lower. That said, this is not a call to buy and you should do your research to understand the companies deeper to make an informed decision.
Invest in other handset brands – Samsung Electronics and Xiaomi
Samsung, Huawei and Apple are the top 3 handset brands in the world. It is precisely that Huawei has been a growing global influence such that attracted the attacks from Trump.
The question is – which brands are going to gain sales from Huawei?
It is unlikely going to be Apple because it is a different cult altogether and the OS is entirely different.
Samsung Electronics (KRX:005930) may steal some market share outside of China but not within. South Korean brands aren’t very welcome in China. You can see the chart below that showed the top four are all Chinese brands – Huawei, vivo, Oppo and Xiaomi.
While vivo and Oppo are doing better than Xiaomi in China, they are non-existent internationally. Xiaomi (SEHK:1810) is ranked #4 in the world and that makes it an overall better performer. vivo and Oppo are not listed so you can’t easily invest in them.
Here is a quick comparison between Samsung Electronics and Xiaomi.
|Samsung Electronics (KRX:005930)||Xiaomi (SEHK:1810)|
|YTD Returns (4 Sep 2020)||+0%||+118%|
|Market Cap||US$312 billion||US$83 billion|
|Revenue||US$194 billion||US$30 billion|
|Revenue growth y-o-y||-5%||+13%|
Samsung Electronics looks a lot cheaper than Xiaomi. The main reason for the difference is that Xiaomi has more growth potential and investors don’t mind paying for a brighter future ahead. Comparatively, Samsung is already a heavyweight and there’s little room to grow.
But beauty is in the eye of the beholder – there will be investors who love stability and Samsung Electronics can still be an option for some.
Xiaomi share price has done very well this year. It has been added to the newly launched Hang Seng Tech Index, together with SMIC. It has also been announced that Xiaomi is now part of the Hang Seng Index too.
China will rise to the occasion eventually, but it will take a while
Attacks on Huawei is intensifying and the rule implemented in May 2020 was a killer.
The world’s biggest chip maker, TSMC, can no longer make chips for the #2 handset maker. Huawei is desperate for options and it is likely to face a problem for the company to produce the high end phones for a period.
A mid-term play for this event is to look at alternative chip makers like SMIC and MediaTek and we have already seen that their share prices have gone up this year.
Another possible play is to invest in other handset brands such as Samsung Electronics and Xiaomi. The former is a stable blue chip while the latter is a growing company with an international presence. Both may steal market share from Huawei before it finds a solution to good chip supply.
I believe that Huawei will survive this and China will gain technological advancement and self-sufficiency in chip design and manufacturing. But it would take years and meanwhile some of these companies could benefit.