ZTE posts weak 150.9m yuan profit | South China Morning Post
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  • Jan 26, 2015
  • Updated: 1:17am

ZTE posts weak 150.9m yuan profit

PUBLISHED : Friday, 27 April, 2012, 12:00am
UPDATED : Friday, 27 April, 2012, 12:00am

ZTE, the world's fifth-biggest supplier of telecommunications equipment, appears to show no signs of improved profitability after posting a weak net profit in the first quarter.

In a report published yesterday, Bernstein Research warned that ZTE could face 'liquidity concerns in the medium term' if the mainland company continues to spend more money to expand operations at all its lines of business, while struggling to boost profits.

Shenzhen-based ZTE reported on Wednesday first-quarter net profit of 150.87 million yuan (HK$185.24 million), up from 127.29 million yuan a year earlier, as it aggressively competed in price to bolster sales worldwide. That missed the 183 million yuan average forecast by analysts polled by Reuters.

Pierre Ferragu, a senior analyst at Bernstein, described the first quarter performance as 'a new absolute low in profitability' for ZTE, which saw revenue rise 24 per cent to 18.61 billion yuan from 14.98 billion yuan the previous year.

He said ZTE's lower-margin handsets and terminals business grew faster than its network equipment business, which suffered from generating 'less high-margin revenue from China and Africa'.

Besides these factors, ZTE is spending more of its available funds in operations, capital spending and financing costs. Bernstein estimated the company spent 7.1 billion yuan in the first quarter, for total spending since 2005 of 22 billion yuan.

'This has already brought ZTE to a net cash position close to zero and a gross debt of 14.6 billion yuan,' Ferragu said.

The mainland firm said earlier this month that it plans to sell as much as 6 billion yuan of bonds, maturing in five years or less, to prop up its cash position and cut down fundraising costs by about 100 million yuan annually. It will also apply this month to renew lines of credit with China Development Bank for US$5 billion and the Bank of China for 23 billion yuan.

Ferragu said that growing debt burden 'will continue to limit ZTE's earnings power for some time' because of high financing costs. 'A weaker balance sheet will most likely weaken ZTE's competitive position, limiting its room to manoeuvre in the [telecommunications] equipment market where working-capital flexibility is of paramount importance to win deals,' he said.

ZTE's share price yesterday closed down 1.63 per cent at HK$19.28. Bernstein rates the stock 'underperform', with a target price of HK$15.

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