Weak profit signals for ZTE as margins shrink

PUBLISHED : Tuesday, 30 April, 2013, 12:00am
UPDATED : Tuesday, 30 April, 2013, 5:27am

ZTE, the world's fifth-largest telecommunications equipment supplier, may be hard-pressed to boost sales and profit this year, despite growing global demand for smartphones and the expansion of 4G networks on the mainland.

In a report published yesterday, Bernstein Research maintained its "underperform" rating on ZTE due to increased competition against telecommunications equipment providers with vastly bigger resources.

The bearish sentiment did not appear to faze investors. ZTE's share price rose 3.71 per cent to finish at HK$12.86 yesterday, its highest close since reaching HK$13.40 on March 28.

Shenzhen-based ZTE, which had posted two quarters of losses, reported last week a 36 per cent rise in first-quarter net profit to 205 million yuan (HK$256 million) from a year earlier. But that rebound was aided by an 803 million yuan gain from the disposal of certain company assets.

Revenue fell 3 per cent to 18.1 billion yuan from 18.6 billion yuan.

ZTE, which was ranked by IDC as the world's No5 mobile-phone supplier last quarter, is targeting worldwide shipments of 50 million smartphones this year, up from 35 million units last year.

In its filing with the Hong Kong stock exchange last week, ZTE said it would also focus on the "broadband conversion of wireless and wire-line networks". It said high-speed 4G mobile network deployments on the mainland and in many international markets were gaining pace.

But Pierre Ferragu, a senior analyst at Bernstein, said in the report: "With 80 per cent of the [telecommunications equipment] market concentrated in players at least twice larger, ZTE cannot bet on its Chinese cost base to make up for its lack of scale."

He said ZTE and unlisted mainland rival Huawei Technologies, the world's second-largest telecommunications equipment supplier, were competing against each other in selling low-cost smartphones worldwide. The result was price competition that "has wiped out all margins" for both companies.

Margins are more depressed on the mainland, where the two firms compete against Lenovo, Coolpad-maker Yulong Computer Telecommunication Scientific and other Chinese smartphone brands.

"Going forward, we expect Huawei to maintain a scale advantage over ZTE," Ferragu said. "We expect ZTE to barely break even in smartphones in 2015, while Huawei would reach about 6 per cent operating margins."

The Bernstein report pointed out that 4G network equipment sales on the mainland were not big enough to help ZTE this year, as commercial rollout is expected to start in the second half.