hong Kong August 22, 2012, 17:32 IST
ZTE Corp , the world's fourth-biggest mobile phone vendor and fifth-ranked telecoms gear maker, posted an 85 percent drop in quarterly profit, as the Chinese firm's margins were squeezed by sluggish equipment sales and fierce competition in handsets.
The outlook for Shenzhen-based ZTE <000063.SZ> is further clouded by an FBI probe into allegations it illegally sold U.S. computer products to Iran. U.S. lawmakers want Treasury Secretary Timothy Geithner to also investigate ZTE, which could face steep fines and restrictions on its U.S. operations. [ID:nL4E8IF04O] Separately, the European Union is investigating whether ZTE benefited unfairly from Chinese government subsidies. [ID:nL3E8HQ3P1]
Those probes and the weakening business outlook have more than halved ZTE's stock price in Hong Kong this year, dropping its market value to below $5.9 billion.
"ZTE's performance for the whole of this year should be an improvement from last year," Michael Li, an analyst with Everbright Securities in Hong Kong, said ahead of the earnings release. "Spending by China's telecom carriers should be a bright spot compared to other markets globally, especially next year."
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"The biggest risk in sight is the U.S. probe over ZTE's sales of banned equipment to Iran," added Li.
Steep falls
ZTE's January-June net profit fell to 244.88 million yuan from 769 million yuan a year earlier, but beat the average forecast for 223.6 million yuan by seven analysts polled by Reuters. Based on Reuters calculations, second-quarter profit dropped to 94 million yuan from 642 million yuan a year ago - the steepest quarterly drop since the first quarter of 2006.
ZTE had warned last month that first-half profit could fall by as much as 80 percent, as gross margins have been squeezed, foreign exchange losses have mounted due to the credit crisis in Europe and China Mobile Ltd <0941.HK> 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 <300077.SZ>.
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 recent report.
Jun Ma, chief investment officer at Guangzhou-based E Fund Management, which owns ZTE stock, said ZTE would benefit from boosting its presence in emerging markets.
"China's telecom industry has stabilised after years of fast growth," Ma said. "If companies like ZTE and Huawei could build up a larger presence in India or other emerging markets, that would create a lot of opportunities."
Higher-end-phones
ZTE and its local rival Huawei have been diversifying into handsets, aggressively chasing market share 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's phones, such as the Blade and Skate models, run on Google Inc's Android operating system, while the Tania series uses Microsoft's Windows. ZTE hopes over the next year to unveil more powerful phones equipped with dual-core and quad-core chips.
ZTE's overall gross profit margins fell by 2.7 percentage points in January-June to 24.6 percent, clipped by lower margins on selling equipment to carriers and on smartphone sales. Gross margins at Alcatel are around 40 percent and Ericsson's are 38 percent, according to Thomson Reuters StarMine data.
"I expect (ZTE's) gross margins for handsets to stabilise, but I'm more concerned with how its margins would fare from its carrier business," said Huang Leping, an analyst at Nomura Securities.
Shares in ZTE - which is around 31 percent-owned by Zhongxingxin Telecom Equipment, which has state-owned shareholders - closed down 0.2 percent in Hong Kong on Wednesday ahead of the results. The benchmark Hang Seng index fell 1.1 percent.