Project delays and fierce competition push ZTE into the red in third quarter

PUBLISHED : Friday, 26 October, 2012, 12:00am
UPDATED : Friday, 26 October, 2012, 2:50am

ZTE, the mainland's second-largest telecommunications equipment manufacturer, reported a net loss of 1.95 billion yuan (HK$2.42 billion) in the third quarter, its first quarterly loss since listing in Hong Kong in 2004.

The company blamed the poor result on delays in overseas projects, a change in the procurement system of domestic operators and low-margin contracts.

"I think ZTE has come close to its lowest point in the near term," said Yan Chengyin, an industry analyst at Beijing's Bayes Consulting, adding that ZTE might have invested too heavily in new fields as it was adjusting its business.

"It might have expanded too aggressively into the mobile-phone business and cloud computing."

But Yan was upbeat on ZTE's prospects in the next quarter. "The fourth-quarter results will surely improve. It will reduce the losses or even swing back into the black."

A recent research note by UBS, however, said it did not see "an opportunity for ZTE to improve its short-term results" and lowered the price target for the stock to 10.20 yuan from 15 yuan.

Shares in ZTE fell 2.5 per cent yesterday to close at HK$10.92, while the benchmark Hang Seng Index edged up 0.21 per cent. The stock has dropped 56 per cent this year, compared with a 15.5 per cent increase in the index.

This year, the company has signed fewer contracts in the high-margin African market while taking up low-profit contracts in Europe in its search for a bigger share in a tough market.

Yan said fierce competition with Ericsson, Alcatel-Lucent and Nokia Siemens Networks in the telecommunications equipment business had forced ZTE to win contracts at the expense of margins.

Telecommunications equipment contributes about half of ZTE's sales, while consumer devices make up about a third.

In the smartphone market, ZTE is climbing up the value chain, but Yan said it still relied on volume rather than margin, unlike Samsung and Apple.

Both ZTE and domestic rival Huawei Technologies are also facing difficulties expanding in the US market as they are seen as potential security threats by Washington.