ZTE stock surges as U.S. supplier ban lifted though
outlook remains uncertain
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[July 16, 2018]
By Sijia Jiang
HONG KONG (Reuters) - Investors on Monday
cheered the lifting of a U.S. supplier ban on China's ZTE Corp
<0763.HK>, pushing its shares up 17 percent, though analysts cautioned
the telecommunications equipment maker still faced many challenges as it
works to revive its business.
The U.S. Commerce Department on Friday lifted a crippling ban on
American firms selling parts to ZTE - imposed in relation to a U.S.
sanctions case - after the Chinese company deposited $400 million in
escrow as part of a settlement reached last month. The settlement also
included a $1 billion penalty paid to the U.S. Treasury in June.
"It's a long way back for ZTE. Not just to win back customer confidence
and assure them, but also work hard to find substitutes to U.S.
suppliers such as Avnet, Qualcomm, Broadcom etc (to reduce reliance),"
said Nikhil Batra, senior research manager at consultancy IDC.
"Essentially, this would mean going back to the drawing board and
rethinking its overall design strategy."
ZTE's Hong Kong-listed stock opened up 5.5 percent on Monday, rising
over 17 percent to HK$16.12 by noon. That was still 37 percent lower
than its last price in April when trading of the stock was suspended for
two months following the ban.
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ZTE's Shenzhen shares jumped by their 10 percent daily limit early on
Monday, as investors brushed off ZTE's forecast on Friday a net loss of
up to 9 billion yuan ($1.35 billion) for the first half of 2018 due to
the fine.
Jefferies analyst Edison Lee estimated ZTE had an operating loss of up
to 4 billion yuan for April-June due to suspending business when the ban
was imposed.
Lee said he expected ZTE to go to each of its non-Chinese
telecommunications customers "and offer incentives of varying degrees to
compensate for their hardship and reward their patience and loyalty".
People familiar with the matter told Reuters that ZTE started reaching
out to clients over the weekend with a letter promising to ramp up
operations as quickly as possible.
Many U.S. lawmakers see ZTE as a national security threat and, on
Thursday, a group of Republican and Democratic U.S. senators urged ZTE's
penalties be reinstated.
The U.S. Senate paved the way for a showdown with U.S. President Donald
Trump over the issue last month, when it passed an annual defense policy
bill with an amendment that could reverse ZTE's settlement.
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![](../images/071618pics/busine25.jpg)
A ZTE smart phone is
pictured in this illustration taken April 17, 2018. REUTERS/Carlo
Allegri/Illustration/File Photo
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The fate of the amendment remains unclear as the Senate and House have yet to
reconcile their different versions. There is bipartisan support for the measure
among members of Congress, but Republicans control both the Senate and House and
party leaders rarely break from Trump's policies.
"The political nature of the issue and the fact that members of the U.S. Senate
are not on board this decision makes it very tricky. Anything could happen,"
said Batra.
Others agreed the prospect of ZTE continuing as before was unlikely.
"In terms of carrier business, we think ZTE is still a competitive telecom
equipment supplier, especially in the 5G era, and its return to business may
help China's 5G development to be back on track," Nomura analysts wrote in a
note to clients on Monday. "However, we think it remains uncertain as to what
extent ZTE can win back the existing customers and explore new businesses."
The ban had been a source of friction between the U.S. and Chinese governments
at a time of escalating trade tension. The ban was imposed in April after
Commerce Department officials said ZTE made false statements about disciplining
35 employees after it pleaded guilty last year to violating U.S. sanctions by
illegally shipping U.S. goods and technology to Iran.
Uncertainty over the ban battered ZTE shares, wiping nearly $11 billion from the
company's market valuation.
As part of the deal to lift the ban, ZTE agreed to remove all members of its
leadership at or above senior vice president level, along with any executives
associated with the wrongdoing within 30 days.
(Reporting by Sijia Jiang; Additional reporting by Anne Marie Roantree and Donny
Kwok; Editing by Muralikumar Anantharaman and Christopher Cushing)
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