Ericsson Takes $109 Million Hit as China Assets Written Down

(Bloomberg) -- Ericsson AB will need to write down assets related to its business in China, resulting in a 1 billion-krona ($109 million) hit to the Swedish telecom giant, the company said in a statement on Monday.

The company is seeking to expand in China as the country’s three major mobile operators invest large amounts in building mobile networks based on the next generation of wireless technology, and it has won business from all of them. The nation’s largest carrier, China Mobile, reported a 549% gain in 5G subscribers in April from January.

China’s other two major operators, China Telecom and China Unicom, last year agreed to build a joint nationwide 5G network. Changes to specifications for the shared network meant that products that Ericsson was slated to deliver could no longer be used, said Peter Olofsson, a spokesman for the company.

Even without the writedown, gaining market share in China comes at a cost, and Ericsson said it expects negative margins in the second quarter in the early phases of 5G buildouts. Still, it also expects “healthy profitability over the life of the contracts” and it’s sticking with its 2020 and 2022 financial targets.

China is moving faster than most other countries to roll out 5G and the potential market opportunity for network equipment suppliers is huge. However, foreign companies face tough competition from homegrown players Huawei Technologies Co. and ZTE Corp.

The announcement “provides incremental clarity around some of the near-term dynamics” for Ericsson in China, “but does not necessarily alter the fundamental thesis around the stock,” Citi analyst Amit Harchandani said in a note to clients. “In fact we would be inclined to view the news as reassuring to a certain degree given some of the recent buyside concerns we have heard around the longer-term impact of the ramp in China.”

Ericsson shares fell as much as 2.5% and were trading 2.4% lower at 86.30 kronor as of 12:50 p.m. in Stockholm.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.