The Huawei Impact

This week, the Trump administration announced a significant relaxation of its restrictions on US companies selling to Huawei, saying the ban will only apply to products that are related to national security. On Tuesday, Wilbur. Ross stated Washington would issue licenses to companies to sell their products to Huawei under certain conditions. This follows last month’s announcement of the US-China trade war truce at the G20 summit. 

For now, Huawei will not be removed the entity list, requiring US companies to seek a license to sell anything made in the US or anything made abroad that could affect national security. 

The news is positive for now, although licenses could dry up if progress is not made in the trade talks. 

Broadcom sent a warning in June of the impact a Huawei ban could have on suppliers. US semiconductor manufacturer Broadcom warned in its Q2 2019 earnings that its 2019 revenue will be $2 billion less than previously expected, according to Reuters. The day of the warning, Broadcom dropped from $281 to $265 and has bounced back to $282, at time of writing. The price rebound was driven by strengths in the semiconductor market and overall money flow into the market with the S&P 500 hitting record highs. 

The micro-cap company, NeoPhotonics, cut its second-quarter guidance amid lower revenue expectations. The stock dropped 44% from $5.72 to $3.84 on news of the Huawei Entity List, which restricts its ability to buy components from U.S. companies. One week later, the company cut guidance from an adjusted loss per share of 15 cents to 5 cents, with revenue of $75 million to $80 million and adjusted gross margin of 22% to 26%. Previous guidance was revenue of $88 million to $93 million and adjusted gross margin of 25% to 29%. The stock was penalized on the news but has regained some territory and is listed at $4.81, at time of writing.

Often trade truces are short lived, which is what we saw following the Trump-Xi meeting in Buenos Aires. These negotiations reached a breaking point in May when Trump accused Xi JinPing of back of backtracking on commitments and retaliated with a 25 percent tariff on $200 billion worth of goods.

The Huawei ban holds a level of importance beyond political posturing as it pertains to national security. The ongoing conflict in Iran is connected to Huawei’s alleged espionage.  We saw the Huawei executive accosted in Canada and the risks that Huawei is a threat to national security is heightened by the prospect of 5G communications.

Investors should be aware that even with the positive media spin from the G20 Summit, the Huawei ban has a high probability of persisting and suppliers for Huawei could continue to see revenue losses in H2 2019 (i.e. watch these suppliers closely and do not get a false sense of confidence). Most importantly, there are mixed signals from the United States as the US Commerce Department placed five more Chinese entities on its so-called Entity List with an announcement on June 21st– one week before the G20 Summit. 

The five newly listed companies included Chengdu Haiguang Integrated Circuit, Chengdu Haiguang Microelectronics Technology, Higon, Sugon, and Wuxi Jiangnan Institute of Computing Technology. Included in the list is one of Higon's five affected aliases, Tianjin Haiguang Advanced Technology Investment Co. (THATIC), THATIC is a joint venture Advanced Micro had set up with the Chinese government in 2016. AMD works with THATIC to license its microprocessor technology to Chinese firms, including Higon.

This caused AMD to drop 3% and Micron Technology and Broadcom to also be indicated as suppliers to the newly listed five companies. 

Prior to the Huawei ban, Texas Instruments had stated the company has completed two quarters of decline, while stating the historical decline typically lasts four to five cycles before growth resumes. Texas Instruments beat earnings estimates of $3.48 billion by reporting $3.59 billion in revenue for Q1, representing a decline of 5.1 percent. Analysts were expecting revenue of $3.67 billion with profit of $1.24 billion per share for the second-quarter but TI revised the second quarter estimates to be between $3.46 billion and $3.74 billion.

Overall weakness in the semiconductor industry has been confirmed by both Texas Instruments and Broadcom. Meanwhile, the Entity List targeted towards Huawei, updated as recent as June 21st, shows mixed signals as to the long-term viability of a relaxed ban. 

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