Investors wipe $3 billion off China's ZTE as U.S.
settlement sinks in
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[June 13, 2018]
By Anne Marie Roantree and Sijia Jiang
HONG KONG (Reuters) - Investors wiped about
$3 billion off embattled Chinese telecommunications giant ZTE Corp's
market value as it resumed trade on Wednesday after agreeing to pay up
to $1.4 billion in penalties to the U.S. government.
China's No. 2 telecommunications equipment maker was crippled when the
United States imposed a seven-year supplier ban on the company in April
after it broke an agreement to discipline executives who conspired to
evade U.S. sanctions on Iran and North Korea.
The ban, which has prevented ZTE from buying the U.S. components it
relies on to make smartphones and other devices, will not be lifted
until ZTE pays a fine and places $400 million more in an escrow account
in a U.S.-approved bank. It was also ordered to radically overhaul its
management.
"While the nightmare is now over, ZTE will likely have to deal with many
changes," Jeffries said in a research report, adding that it expects
significant near-term selling pressure on the company's shares.
Confirming details of the U.S. deal, ZTE said late on Tuesday it would
replace its board of directors and that of its import-export subsidiary
ZTE Kangxun within 30 days of the June 8 order being signed by the
United States.
All members of its leadership at or above the senior vice president
level would be removed within the 30-day period, with a commitment that
they would not be re-hired, along with any executives or officers tied
to the wrongdoing, it said.
The U.S. commerce department can exercise discretion in granting
exceptions.
According to a Reuters estimate based on company filings and a source
with knowledge of the matter, that could result in about 40 senior
executives being replaced including its 14-person board, based on its
current management structure.
ZTE has more than a dozen senior vice presidents, which is a level below
executive vice president, said the company source who declined to be
identified as they were not authorized to speak to the media.
As part of the U.S. order, the Commerce Department also will select a
monitor, known as a special compliance coordinator, within 30 days to
report on compliance by ZTE and its affiliates worldwide for 10 years.
The coordinator will have a staff of at least six employees funded by
ZTE.
"The compliance monitor will be on the same level as ZTE's CEO and board
on compliance matters. The new governance structure will pose challenges
for the company's management in the future," Zhongtai Securities said in
a note.
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The logo of China's ZTE Corp is seen on the building of ZTE Beijing
research and development center in Beijing, China June 13, 2018.
REUTERS/Jason Lee
SHARES PLUNGE
The Hong Kong-listed shares of ZTE slid as much as 41 percent to HK$14.98, their
lowest in a year, following a two-month trading suspension. Its Shenzhen shares
fell by their 10 percent limit to 28.18 yuan after it confirmed details of the
agreement publicized by the U.S. government on Monday.
Hong Kong's benchmark Hang Seng index was down 0.6 percent by the midday break.
During its trading halt, fund managers cut their valuations of ZTE shares, with
some lowering valuations of its A-shares to 20.04 yuan per share, or a 36
percent discount to the closing level on April 16.
ZTE also said in filings on Tuesday that it would work to resume operations as
soon as possible after the ban gets lifted, and would republish its
first-quarter financial results after assessing the impact of the ban and the
settlement agreement.
Jeffries said it expected ZTE to pay its penalty in a few days and resume
operations next week.
The case has become a focus of bargaining talks as Washington and Beijing look
to avert a trade war.
U.S. lawmakers have attacked Washington's agreement with ZTE and plan
legislation to roll it back, citing intelligence warnings that ZTE poses a
national security threat.
ZTE, with a market value of about $20 billion before its shares were suspended
in April, is the world's No.4 telecom equipment maker after Huawei Technologies
[HWT.UL], Ericsson and Nokia.
(Additional reporting by Donny Kwok; Editing by Stephen Coates)
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