Xinhua Finance upgrades the issuer rating of ZTE Corp. to A+

March 3, 2005

3 Min Read

HONG KONG -- Xinhua Far East China Ratings, part of Xinhua Finance's credit ratings division, today upgraded the issuer credit rating of ZTE Corporation ("ZTE" or "the Company", SZ A 000063, HK 0763) from A to A+, the highest rating assigned to companies in China's technology sector. The rating outlook is stable.

The upgrade reflects ZTE's remarkable results in managing rapid and consistent turnover and earnings growth while maintaining sound profitability and prudent financial management over past few years. Xinhua Far East notes that despite uncertainties in domestic regulatory environment and increasing competitive pressure from domestic and international rivals, ZTE has been successful in formulating and executing shrewd strategies to capitalize on growth opportunities and diversify its revenue sources. In addition, its successful secondary listing on Hong Kong Exchange in December 2004 not only strengthens its financial position but also enhances its disclosure and corporate governance, thereby lowering its investment risks.

As a result of these factors, ZTE has managed to build a strong balance sheet and diversify its product base, both of which help mitigate inherent risks in the telecom equipment sector in China. These risks include uncertainties over technology and product development, the evolving regulatory environment and a reliance on large domestic telecom operators.

With an established customer base of domestic telecom service providers and as a result of vibrant growth in China's telecom industry, ZTE has become one of China's leading telecom equipment providers, with annual revenue of more than USD 2 billion. It has maintained sustainable growth by emphasizing R&D and diversifying its product base.

Its strong R&D capability and the ability of management to grasp the evolving and dynamic market and fast regulatory changes have enabled the Company to launch profitable new products and penetrate overseas market. Amid uncertainties about future industry standards and the launch of third generation wireless telecommunication licenses, ZTE has made distinguished progress in launching and developing PHS systems, mobile phones and CDMA1x products. These product areas have not only become new revenue streams for the Company, but have also diversified its product base. In Xinhua Far East's opinion, the Company's balanced product portfolio and its approach to product development will mitigate the regulatory uncertainties around products launches, and the scope and standards of new telecommunication platforms such as 3G.

The Company has made ongoing efforts to expand to overseas markets. Bolstered by a low cost structure in R&D and manufacturing and, to a certain extent, China's solid diplomatic ties with Eastern European and African countries, ZTE has been able to win several bulk orders from price-sensitive developing countries. As a result, ZTE's contract sales for the past two years have been diversified, both in terms of product mix and market locations.

The rating action also reflects the favorable impact on ZTE of its successful listing on HKSE in late 2004. The listing provides considerable funding to fuel ZTE's further expansion into international markets and to upgrade its R&D capability; it also offers direct access to international financial market. At the same time, Xinhua Far East expects ZTE's transparency and corporate governance to be improved by the broadened investor base and more sophisticated regulatory environment in Hong Kong.

Nevertheless, like its peers, ZTE is vulnerable to the intrinsic risks found in the telecommunication sector, including the volatility that comes with clients' investment in telecommunications networks and equipment, changes to technology and regulations, as well as increasing competition from overseas competitors. Further penetration into overseas markets will create additional execution risks. All these constrain the Company's rating at current level.

The Company's rating outlook is stable, given its strong balance sheet, a robust home market, its diversified product mix and its solid R&D capability.

ZTE Corp.



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