ZTE slumps after agreeing $1 billion fine and major overhaul

ZTE Corp’s shares cratered in pre-market trading after agreeing to pay at least $1 billion in penalties and overhaul its management as part of a sweeping settlement agreement that allows it to resume business after a two-month hiatus.

Stock in China’s second-largest telecoms equipment maker fell 37.5%  in pre-market Hong Kong trading. ZTE resumes trading for the first time since a suspension in April, when the US imposed a ban on its purchases of vital American technology in punishment for Iran sanctions violations.

ZTE agreed to pay $1.4 billion in total penalties, including a lump sum payment of $1 billion and a suspended penalty of $400 million, it said in a filing with the Hong Kong stock exchange.

The settlement also calls for replacing the entire boards of both parent ZTE and subsidiary ZTE Kangxun within 30 days of the order, as well as terminating all current members of senior leadership at both companies.

“While the nightmare is now over, ZTE will likely have to deal with many changes,” analysts Edison Lee and Timothy Chau at Jefferies wrote in a note. “We expect significant near-term selling pressure and a volatile stock price.”

The company’s future remains uncertain. The US Senate advanced legislation to restore penalties on ZTE, after President Donald Trump advocated for the Commerce Department settlement easing restrictions.

The Senate voted 91-4 late Monday to begin debate on the National Defense Authorization Act, including an amendment that will keep restrictions on ZTE.

The provision was included on a list of amendments that is backed by both Republicans and Democrats.

The Shenzhen, Guangdong-based company is said to incur losses of at least $3 billion as a result of the US action.

Analysts at Jefferies gave a price target of HK$14.41 in a research note, down from more than HK$25 before the suspension. Citi analysts targeted HK$15.

Commerce Secretary Wilbur Ross said the legislation that would restore penalties on ZTE is not a certainty as the measure still needs final approval. “We’ll see if it does” get through Congress, Ross said in an interview in Washington on Tuesday.

The US blocked ZTE’s ability to buy from US suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations.

That choked off supply of the chips and other components it needs to make networking gear and smartphones, forcing the company to grind to a halt just weeks later.

ZTE, in its filing, detailed extensive steps it will take to comply with the settlement. The company will complete and submit nine audit reports of its compliance with US export control laws.

It plans to assess the full impact of the April 15 US export denial order and disclose an updated financial reports.

Read: ZTE to pay a record fine to get back in business

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ZTE slumps after agreeing $1 billion fine and major overhaul