In June, Ericsson (NYSE:ERIC) warned investors that it would take a $109 million write-down on its product inventory in China. It also suggested that it would have negative gross margins due to 5G contracts with three different mobile carriers in the country. On the surface, that wasn’t good news for Ericsson stock.
Dig deeper and investors will see that its Chinese business is strong and getting stronger. One example is the work it’s doing in Shenyang, a city of 7.3 million, and the 14th largest in all of China.
If you own Ericsson stock, Shenyang is another example of why it’s a smart way to play the growth of 5G.
I’m sure President Trump cannot see the progress China’s making for its people, but Ericsson has a front-row seat to the action.
A Closer Look at Ericsson Stock
In January, a research report was published by SOS International LLC on behalf of the U.S.-China Economic and Security Review Commission. Entitled China’s Smart Cities Development, it provides excellent insight into what’s happening in urban cities across China, including Shenyang.
Using monitoring technology, AI and embedded sensors China has become a global leader in smart city initiatives. The country has about 800 smart cities pilot programs either underway or in the planning stage. There are fewer than 1,600 total smart cities in the world.
Until February 2018, I lived in Toronto. It was working with Google to build a smart city development on Toronto’s lakeshore. For various reasons, the project was canceled in May. Canadians are still uncomfortable about big ideas like the Sidewalk Labs experiment.
The Chinese, on the other hand, seem to understand the importance of smart cities as part of its goal to become the world’s leading economy.
According to the report, the size of the smart cities solutions market in China is estimated to be worth $1.1 trillion (2018), with 33% annual growth between 2018 and 2022. If these estimates are accurate, the market in China for solutions that Ericsson is providing will grow to $3.4 trillion by the end of 2022.
While a large amount of this spending will go to Chinese companies, Ericsson benefits from this movement.
Ericsson’s Radio Dot System Connects Subway Users
On Sept. 8, Ericsson published news about its work in Shenyang that was helping connect China Mobile’s (NYSE:CHL) mobile 5G customers using the city’s Line 9 subway. Through the installation of Ericsson’s Radio Dot System at all 22 of the subway line’s stations, more than 900,000 passengers a day can receive 5G communication.
Ericsson stated in its news release that its 5G radio dot deployment helps China Mobile give its customers better internet in the subway, including high-quality streaming video.
Ericsson installed a total of 500 of these 5G radio dots across the 22-station network in just 20 days, or one-third the time allotted to complete the project. Ericsson estimates that mobile traffic will increase by 31% annually over the next five years through 2025. Much of the traffic will be for videos, which currently account for 63% of the traffic, but expected to grow to 76% by 2025.
“We have worked closely with China Mobile on the Shenyang Subway Line 9 deployment and it is a milestone for 5G-enabled transportation in Liaoning province, said Dr. Jessey Huang, Head of Ericsson’s Indoor Product Line. “This opens doors to high-speed connectivity with low latency to passengers for bandwidth-intensive applications while on the move.”
As Ericsson stated in June, the contracts it’s won from all three of China’s major wireless carriers (China Mobile’s one of them) give it scale in the world’s largest 5G market. That will result in significant profits over the life of these contracts.
Projects like the subway line in Shenyang demonstrate why so many of my InvestorPlace colleagues are high on Ericsson stock. While it continues to capture more of the Chinese market, the U.S. and Europe are still fertile ground for its 5G hardware.
I liked it better than its Finnish rival in July. Nothing’s changed to alter my opinion. ERIC stock remains a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
