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.