ZTE Tanks on Trading Resumption, Ejects Entire Management Team

Iain Morris
News Analysis
Iain Morris, News Editor
6/13/2018



Shares in embattled Chinese telecom vendor ZTE lost nearly 42% of their value in Hong Kong today as the company resumed trading and said it would replace all members of its senior management team.

The company's share price was frozen at HK$25.6 on April 16, when the US government banned it from acquiring US components for breaching sanctions against Iran and North Korea, a move that effectively crippled its business and threatened to wipe the company out altogether. (See ZTE Ceases Business Operations After US Ban.)

Now, though, it reflects the company's woes, as on resumption of trading it fell to just HK$14.96 at the close of trading in Hong Kong Wednesday.

The slump in ZTE's share price reflects investor concern about the changes the company will have to make as it returns to business, as well as the impact of a $1.4 billion fine by US authorities.

A penalty payment of $1 billion, due in the next two months, will chew into ZTE's earnings this year, and the company is already said to have racked up $3 billion in losses during its enforced hiatus. (See ZTE Fined Another $1B in Rescue Deal With US and ZTE Racks Up Losses of $3B After US Ban Report.)

ZTE reported a net profit of about 1.7 billion Chinese yuan ($270 million) on revenues of nearly RMB29 billion ($4.5 billion) for the first three months of the year.

Heavily reliant on US components, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) was forced to cease business operations following the recent moves against it by US authorities. It has been able to resume trading following the apparent intervention of President Donald Trump, who tweeted last month that he was working on a rescue deal for ZTE with Chinese leader Xi Jinping. (See Trump Says ZTE Can Re-Open... With Conditions.)

Last week, the US Commerce Department announced it had reached an agreement with ZTE under which the company would pay a hefty fine, make changes to its management and install a "compliance" team chosen by US authorities. (See ZTE Fined Another $1B in Rescue Deal With US.)

In a statement issued yesterday, ZTE said it would pay the $1 billion fine by the deadline agreed with the US Commerce Department and place another $400 million in "escrow" for a probationary period of ten years.

Besides replacing the entire board of directors at ZTE as well as ZTE Kangxun (its import-export subsidiary), it will sack anyone at or above the senior vice president level. Based on company filings, this means that about 40 executives will leave the company, according to Reuters.

That move comes in response to US complaints that ZTE had failed to properly discipline senior executives after it was last year fined about $900 million for its initial violation of the sanctions against Iran and North Korea.

That fine, which came after ZTE was accused of selling equipment that included US components to those countries, wiped out company profits in 2016. But ZTE had bounced back strongly, reporting growth in both sales and earnings in the first quarter of 2018 before its latest run-in with US authorities.


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Addressing US demands, ZTE also said it would retain a "special compliance coordinator" (SCC) to monitor, assess and report on compliance by ZTE and its global subsidiaries. The SCC will report equally to ZTE's CEO and board of directors and the US Commerce Department.

Analysts say ZTE has been a victim of the ongoing trade dispute between the US and China. Various US officials are said to be angry at what they perceive to be intellectual property infringements by Chinese companies.

The backdrop is concern that China could take a leading position on the development of game-changing new technologies, such as 5G and artificial intelligence.

Both ZTE and bigger Chinese rival Huawei Technologies Co. Ltd. have been locked out of doing business with large US operators since 2012, when a US government report described both companies as a threat to national security.

Huawei is now reportedly under investigation for breaching sanctions against Iran and could, like ZTE, potentially be forced into striking some sort of deal with the US authorities. (See US Ban on Huawei Would Trigger Turmoil in Telecom Industry and Will Trump Make a Deal With Huawei?)

Iain Morris, International Editor, Light Reading

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