Comba Telecom Rings Up Red Ink On 5G Spending Slowdown

Key Takeaways:

• Comba Telecom lost money in the first half of the year as China’s three wireless carriers continued to cut spending on their 5G networks
• The telecoms equipment supplier said its financial position “remains sound,” even as it canceled its final dividend last year and reported its cash fell by 20%

By Doug Young

After a brief spending frenzy with its launch of 5G telecoms services five years ago, China has rapidly slammed on the brakes in its new network building – a move that’s casting a chill over the companies that briefly grew fat on spending during the buildup. Comba Telecom Systems Holdings Ltd. COBJF has become the latest to catch a cold, announcing it swung into the red in the first half of this year due to the slowdown.

Comba is hardly the only company to get infected as a result of China’s rapid telecoms spending slowdown. Last month, rival AsiaInfo ASNFF also announced it would report its first-ever loss in the first half of this year since its Hong Kong listing in 2018, as its revenue fell between 7% and 13% for the period.

This sudden fall into the red isn’t a huge surprise, and reflects one of the big risks for companies that feed off China’s big state-run sectors like energy and telecoms services. While such sectors typically have several major players, they all effectively operate as a single entity that makes decisions based on Beijing’s ever-shifting strategic priorities.

In this case, China was determined to be a global leader in 5G services when they were first launched in 2019, and ordered its three main carriers to spend lavishly to quickly build up world-leading networks. But now those three, China Mobile, China Unicom and China Telecom, are rapidly ramping down spending as their networks are already quite extensive and underutilized.

China Mobile has announced a 4% cut in its capital spending plans for this year, while China Telecom and Unicom are lowering their spending by 3% and 12%, respectively. All three are slashing spending on their networks even more sharply. China Telecom is typical of the group, cutting its spending on mobile networks by 15.2%.

Making matters even worse, China Mobile indicated earlier this year that it will use its 5G equipment for longer than previously expected by incorporating some of it into its future 6G network. That means the next big spending wave is likely to be smaller whenever it comes, which is probably still another four or five years away.

All of that makes the situation look quite grim for Comba, AsiaInfo and anyone else who relies heavily on network spending by Chinese telcos.

Comba’s profit warning issued on Friday was quite curt in terms of financial forecasts, saying only that the company would report a loss of up to HK$160 million ($20.5 million) for the first six months of the year, reversing a HK$112 million profit a year earlier. That would mark the company’s first loss since 2021.

Comba blamed the turnaround on delayed network construction worldwide, though it looks like most of the delays were in China. “The board considers that the group’s financial position remains sound with sufficient working capital,” it added, trying to ease any concerns of a looming capital crunch.

But if things continue to deteriorate, as looks likely, it could only be a matter of time before Comba’s situation becomes less sustainable. The company’s cash position already fell about 20% to HK$1.2 billion by the end of last year from HK$1.5 billion at the end of 2022. And hinting at its growing concerns, the company’s board decided not to pay a final dividend after Comba’s profit plunged last year.

Investor Flight

Investors reacted to the company’s announcement by dumping its shares to the tune of a 10% selloff in early Monday trade in Hong Kong. That wiped out the stock’s previous small gain for the year, and the shares have now lost nearly 40% over the last 52 weeks.

Things looked much better for Comba and its peers in earlier times when China’s telecoms spending was steadier as the country played catchup with the rest of the world. Its shares tripled in their first eight years after it listed in Hong Kong back in 2003 and China was building up 3G and 4G networks. But the stock has moved steadily downward since then and now trades about 50% below its IPO price – not the greatest return for anyone who has held it over the last two decades.

This latest earnings dive is hardly unexpected, since Comba’s performance was already deteriorating last year. The company’s latest annual report says it has 20 overseas offices and sells its products in more than 100 countries and regions worldwide.

But a closer inspection shows China’s three main telecoms carriers, plus the country’s cellular tower operator, China Tower, accounted for nearly half of Comba’s revenue last year. Its largest single other revenue source from “international customers and core equipment manufacturers,” accounting for 40% of revenue last year, also probably includes a significant number of Chinese customers like telecoms equipment makers Huawei and ZTE.

As China’s telecoms network spending slowed, Comba’s revenue fell 6% last year to HK$5.98 billion from HK$6.36 billion in 2022. It didn’t provide a revenue forecast for the first half of this year in its latest announcement, but it’s probably safe to assume the rate of decline accelerated from last year.

Last year’s slowdown all came from China, with China Mobile and Unicom both slashing their orders with Comba by more than a quarter. That slowdown was partially offset by higher spending by international customers and core manufacturers, which rose about 10%.

As spending in China tumbled, Comba’s gross margin fell to 27.8% last year from 29.4% in 2022. That caused its profit to nearly evaporate to just HK$6.7 million from HK$190 million in 2022. The company’s stock now trades at a meager price-to-sales (P/S) ratio of just 0.4, which trails the 0.5 for AsiaInfo and 0.6 for ZTE. But none of those is anything to get too excited about, and the ratios could drop further still as China continues to sharply put the brakes on its telecoms spending over the next two to three years.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.