ZTE shares slump to 3-year low on profit warning, US probe
Employees of ZTE chat on the roof of its headquarters in Shenzhen, Guangdong province, in this April 17, 2012 file photo. — Reuters picHONG KONG, July 16 — Shares of ZTE Corp, the world's fifth-biggest telecommunications equipment maker, fell to their lowest in more than three years in Hong Kong as a profit warning and a probe by the US government cast a gloom over the company's near-term fortunes.
Chinese telecoms equipment manufacturers including Huawei Technologies Co Ltd have been hit by sluggish global spending on networking gear, with ZTE saying last week that first-half profit could slide as much as 80 per cent.
The earnings warning came as a report emerged that the FBI has opened a criminal investigation into ZTE over the sale of banned US computer equipment to Iran and its alleged attempts to cover it up and thwart a Department of Commerce probe.
“The FBI probe would adversely affect ZTE's ability in bidding for overseas projects, and it's a major negative,” said Lou Zhen, a fund manager at Shanghai Anode Industrial Investment Co, which doesn't own ZTE shares. “Investors have reason to be concerned about the company's growth prospects and there's still room for the stock to fall.”
ZTE, which counts China Life Insurance Co and BlackRock Asset Management among its shareholders, could face steep fines and restrictions on its US operations if it is found to have illegally sold US computer products to Iran.
An investigation by the European Union Commission on whether Huawei and ZTE have accepted illegal subsidies from the Chinese government has also pressured ZTE's shares in the past month.
“The biggest risk in investing the stock is that it's non-transparent. It's related to the nature of the business and coupled with the fact that the management is not really that willing to talk to the investors,” said Jenny Tian, a managing partner at Hong Kong-based hedge fund Springs Capital.
ZTE's stock slumped 17.4 per cent to as low as HK$10.32 today, the weakest intraday level since March 4, 2009, with trading volume more than doubling that of its 30-day average.
Stiff competition in the mobile phone business in China, the world's biggest market by subscribers, has cut ZTE's gross profit margin by 2.03 percentage points to 30.26 per cent last year, according to its annual report.
A fall in the euro and many emerging currencies due to the European debt crisis has also caused ZTE to take a foreign exchange loss in the first half, compared to a gain a year earlier, the company said last week.
“We're quite negative on the stock, mainly because they are unable to lift their gross margins as they've been focusing on gaining market share at low prices. Some of their contracts are money-losing after factoring the costs of their operations in certain markets,” said a Hong Kong-based analyst at a fund management company that invests in ZTE shares.
ZTE's shares have more than halved in value since the beginning of the year. — Reuters
