Huawei Bonds Outshine Alibaba, Tencent in Downturn

(Bloomberg Opinion) -- Debt investors seem to believe that telecoms equipment maker Huawei Technologies Co. could make a better bet in troubled times than its national peers, including China’s two biggest internet companies.

While the Bloomberg Barclays Index of high-yield U.S.-dollar Chinese bonds has dropped 6.2% over the past month, Huawei’s 2026 debt has climbed 1.2% and its  2027 notes are up 0.1%. That’s better short-term performance than both Tencent Holdings Ltd., China’s biggest social media company, and e-commerce giant Alibaba Group Holding Ltd.

At the heart of this relative optimism is the knowledge that while a private company, Huawei is cushioned from short-term consumer sentiment and economic shocks by its dominant domestic position. It’s the leading supplier of equipment used in communications networks, and the largest vendor of smartphones. No matter what happens around the world, Huawei has a home market that still needs its gear as part of China’s strategically important, long-term 5G mobile rollout.

The same must-have factor doesn’t apply to the major internet companies, which are both highly reliant on short-term consumer spending. Debt investors are pricing that difference. The price of Tencent bonds due in 2026 has climbed 0.5% over the same period, while Alibaba bonds for 2027 are down 3.4%.
 

It’s worth noting that Tencent and Alibaba are both rated A+ by Standard & Poor’s Financial Services LLC, the agency’s third-highest rank, which means they’re part of the investment-grade indexes. A Bloomberg Barclays index for U.S. dollar investment grade debt has climbed 0.5%. Huawei’s bonds aren’t rated, according to Bloomberg data, and are considered high-yield, which puts them in indexes under that category.

We’ve observed debt investors’ underlying belief in Huawei before, despite the company facing significant opposition from foreign governments such as the U.S. that deem its equipment a security risk. In October, I noted that four different series of U.S. dollar bonds continued to march upward even as Washington sought to stop Huawei’s communications gear from being used in global 5G mobile networks. In fact, it took the global spread of the Covid19 coronavirus to end a 10-month bull run on Huawei bonds, which peaked on March 9.

Huawei’s shares aren’t listed, which means we can’t assess equity sentiment. But the view toward Alibaba is clear. Its shares are down 18.6% over the past month as investors come to realize that even China’s most prominent names won’t be able to dodge a slowdown in the global economy. Tencent’s shares haven’t fared much better, dropping 15.1%.

Having confined themselves largely to their home market, Alibaba and Tencent managed to dodge the trade war with the U.S. and growing concerns over the security of Chinese technology. As a result, sales and profits continue to climb. Huawei, on the other hand, has had its global ambitions thwarted over such fears, hurting revenue. Yet the longer-term picture remains intact because China is determined to build out the world’s most-advanced mobile network, and it can’t do so without Huawei. For bond investors, that translates to a relatively good chance it will pay its bills.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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