ZTE expects profit pickup after let-down in first half
Telecoms equipment maker posts 26 per cent lower-than-expected gain to 310 million yuan
ZTE, the world's fifth-largest supplier of telecommunications equipment, forecast improved profitability in the second half of the year after reporting lower-than-expected earnings in the six months to June.
In a filing with the Hong Kong stock exchange last night, Shenzhen-based ZTE said it would post a net profit of between 500 million yuan (HK$633 million) and 750 million yuan for the nine months to September, rebounding from a 1.7 billion yuan loss in the same period last year.
The company said the turnaround was being made on the back of improved gross profit margins and strict cost controls.
It reported a 26.6 per cent increase in net profit to 310 million yuan for the first half on cost controls and greater efficiency. It also recognised a substantial gain from the disposal of interests in a subsidiary, surveillance equipment maker Shenzhen ZNV Technology.
Revenue fell 11.9 per cent to 37.58 billion yuan as demand for 2G and 3G network products on the mainland decreased.
Ricky Lai, a research analyst at Guotai Junan International, said foreign exchange losses also contributed to first-half results falling below expectations.
Still, Lai said ZTE would be "one of the beneficiaries of the mainland's deployment of 4G networks and the central government's mandate to speed up development of the country's fixed-line broadband network".
He expected ZTE's smartphone business to gain from robust demand on the mainland, the world's biggest market for the devices.
Bernstein Research, however, predicted "no upside for ZTE" from either its core telecommunications network equipment business or the smartphone market.
In a research note, senior analyst Pierre Ferragu said: "Scale will remain a structural issue limiting profitability and putting stress on the [company's] balance sheet.
"With 80 per cent of the [global wireless network] market concentrated in players at least twice larger, ZTE cannot bet on its Chinese cost base to make up for its lack of scale."
Ericsson, Huawei Technologies, Nokia Solutions and Networks, and Alcatel-Lucent lead the market for wireless infrastructure.
Bernstein's report said China Mobile's rollout of more than 200,000 TD-LTE-standard 4G base stations across the mainland was an opportunity that was "not big enough" for ZTE, either for the second half of this year or next year. It was offset by decreased spending on 2G and 3G networks on the mainland, and ZTE favouring higher margins over revenue growth.
In the global smartphone market, price competition between Huawei and ZTE "has wiped out all margins", Ferragu said.