ZTE expects massive quarterly loss

ZTE Corp, the world’s fourth-biggest mobile vendor and fifth-ranked telecoms gear maker, is set to report a near-90 percent slump in quarterly profit on Wednesday, squeezed by sluggish equipment sales and fierce competition in handsets.

The outlook for Shenzhen-based ZTE is further clouded by an FBI probe into allegations it illegally sold U.S. computer products to Iran. U.S. lawmakers have also called on U.S. Treasury Secretary Timothy Geithner to investigate ZTE, which could face steep fines and restrictions on its U.S. operations.

Separately, the European Union is investigating whether ZTE benefited unfairly from Chinese government subsidies.
ZTE, whose stock price has more than halved this year in Hong Kong, reports half-year results later on Wednesday.

“ZTE’s performance for the whole of this year should be an improvement from last year,” said Michael Li, an analyst with Everbright Securities in Hong Kong. “Spending by China’s telecom carriers should be a bright spot compared to other markets globally, especially next year.”

“The biggest risk in sight is the U.S. probe over ZTE’s sales of banned equipment to Iran,” added Li.

Steepest fall since HK listing

ZTE is expected to report a January-June net profit of 223.6 million ($35 million), according to seven analysts polled by Reuters, down 71 percent from 769 million yuan a year earlier. Based on Reuters calculations, that would mean ZTE earned just 72.7 million yuan in the second quarter, a drop of 88.7 percent from the same period last year.

That would be the steepest fall since ZTE listed its shares in Hong Kong in late-2004, based on previously announced data. Apart from the first quarter, ZTE has logged net profit falls since the second quarter of last year.

ZTE last month issued a profit warning – predicting a drop of 60-80 percent for the first half – as gross margins have been squeezed, foreign exchange losses have mounted due to the credit crisis in Europe and China Mobile Ltd postponed its network tender.

Analysts also noted that ZTE’s year-ago earnings were inflated by the sale of shares in its Shenzhen-listed unit Nationz Technologies Inc.

Telco gear pick-up

Telecom equipment makers such as Ericsson, Huawei Technologies Co Ltd and Alcatel Lucent have reported disappointing results this year as telecom carriers cut back on spending during the tough economic climate.

But analysts expect a pick-up in Chinese telecom spending later this year, which should help ZTE’s second-half earnings.

“Our channel check shows that Chinese telecom operators completed only 30 percent of their full-year capex in the first half, and we expect them to fulfill their full-year plans,” BOCI Research said in a report.

Chinese vendors Huawei and ZTE have been diversifying into handsets, where they have aggressively chased market even at the expense of low margins. Both have said they plan to sell higher-end smartphones to boost margins in the coming years.

ZTE has seen its gross profit margins fall to below 30 percent, lower than Alcatel’s around 40 percent and Ericsson’s 38 percent, according to Thomson Reuters StarMine data.

ZTE is around one third owned by Zhongxingxin Telecom Equipment, which is based in the southern city of Shenzhen and has state-owned shareholders. Other stakeholders include China Life Insurance Co and BlackRock Asset Management.

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ZTE expects massive quarterly loss