Chinese chipmakers soar on 5G ambitions

By Bloomberg | 21 Sep 2019 at 18:22hrs
China's ambitions for next-generation wireless networks have propelled the country's two leading printed circuit boards makers to new heights. The party may just be getting started.

Jiangsu-based WUS Printed Circuit Kunshan Co. and Shenzhen-based Shennan Circuits Co. shot to record highs on Friday, capping a stunning months-long run on anticipation of billions of dollars in spending by Chinese carriers on fifth-generation networks. PCBs are vital for a spectrum of electronics from smartphones to base stations to smart cars.

Shares of WUS have doubled in the third quarter alone, their strongest growth since its initial public offering in Shenzhen nine years ago. Rival Shennan surged 55% during the same period. Yet both have room to run because homegrown players are now favoured by Beijing, which is increasingly wary of using foreign technology as tensions with Washington ratchet up.

China's 5G rollout, which will require a level of spending unseen in the rest of the world, should underpin the two PCB makers' longer-term prospects. Both supply components to Huawei Technologies Co. and ZTE Corp., the nation's networking leaders.

"Apart from 5G demand, China's attempt to use home-made tech components will drive the businesses of WUS and Shennan," said Zhu Jixiang, an analyst with CSC International Holdings. "The growth momentum of the PCB sector should continue."

Industry bellwethers Shennan and WUS took off in the third quarter
On the flip side, WUS and Shennan look pricey in the wake of their rallies. WUS is trading at about 39 times its blended two-year projected earnings, well above the 20 times average of its peers. And Shennan is at 42 times its one-year projected earnings, again outpacing the industry.

Analysts argue both are solidly profitable businesses with essentially new sources of future revenue. WUS's net income surged 143% in the first half and is expected to grow on average 83% in 2019. Its counterpart is expected to increase profit by 43% this year. Those numbers surpass longstanding investor darling Kweichow Moutai Co., which is expected to grow net income by around 23%.

"The surge in PCB makers since June was due to on-target shipment of 5G base stations as well as increasing demand from smartphone vendors," said Bright Smart Securities analyst Mark Huang. As Chinese 5G ramps up, PCB-related stocks are likely to sustain the current growth momentum, Huang said.



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