ZTE shares plunge as rescue deal threatened
Chinese telecom giant’s 42-per-cent fall points to investor wariness about its future
HONG KONG— Shares of ZTE Corp. plunged on their first day of trading since the stock was suspended nearly two months ago, reflecting investor unease about the future of the Chinese telecommunications giant following devastating U.S. sanctions.
Shares in Hong Kong tumbled 42 per cent to close at 14.96 Hong Kong dollars, or about $1.91 ($2.48 Canadian), while the company’s Shenzhen-listed shares fell 10 per cent, hitting their daily limit. In all, the declines wiped out $2.7 billion of market value, according to FactSet.
Shares had been halted since April 17, after an order from the U.S. Commerce Department banned American companies from selling to ZTE, effectively shutting off the supply of components the Chinese company needs to make smartphones and telecoms gear.
The U.S. said ZTE broke the terms of a 2017 settlement in which it pleaded guilty to dodging American sanctions on Iran and North Korea.
After intervention from U.S. President Donald Trump, ZTE got a lifeline last week when Commerce Secretary Wilbur Ross announced a deal to keep it in business in exchange for fines and a change in management. That deal paved the way for ZTE shares to resume trading. The company said Tuesday that it would restart business operations “as soon as practicable,” though the sales ban remains in place until ZTE pays the fines.
ZTE’s resuscitation is far from certain, however, as a bipartisan effort to block its rescue moves forward in Congress. Senior Republican senators indicated Tuesday that their efforts to keep sanctions on ZTE — via an amendment to a must-pass defense bill — aren’t being met with opposition from the White House.
Edison Lee, who follows ZTE for the investment bank Jefferies, said the share plunge reflects diminished confidence by investors in ZTE management following the Commerce Department actions.
“They think the level of uncertainty in the company has dramatically increased,” Mr. Lee said.
The drop likely doesn’t price in the potential that ZTE’s rescue could fall through in Washington, he said.
Even if ZTE survives the political backlash to its rescue, it faces steep challenges ahead. It must mend its business ties with suppliers and customers and implement the latest agreement with the Commerce Department, which includes a sweep of its 14-person board of directors, the removal of senior executives and the payment of a $1 billion fine. It must also place another $400 million in escrow. On Monday, ZTE issued a memo to employees announcing the establishment of a three-person “execution team” charged with putting the new agreement to work. The team is responsible for handling the coming termination of senior executives and with matters relating to the replacement of the board of directors, according to the memo, which was reviewed by The Wall Street Journal.
Still, the damage to the company is likely to be lasting. Analysts at Citigroup expect it to log “a significant loss” in its fiscal 2018.
“We expect ZTE will likely lose market share in some developed markets,” Citi said, a negative sign because overseas sales account for about half of ZTE’s total revenue.
ZTE Chairman Yin Yimin acknowledged the toll of the department’s actions in a letter to employees sent last week.
“The activation of the denial order has caused huge losses and the Company has paid a huge price,” he wrote in the letter, which was also seen by The Wall Street Journal. “On behalf of the Company’s board of directors and management, I would like to apologize to all employees, customers, shareholders and partners.”