ZTE shares plunge in Hong Kong and Shenzhen after firm agrees to pay US$1.4 billion fine

ZTE tumbles 42 per cent in Hong Kong while its Shenzhen-traded stock tumbled by the 10 per cent daily limit, with Citic Securities predicting another 28 per cent drop in the mainland-listed shares

PUBLISHED : Wednesday, 13 June, 2018, 9:53am
UPDATED : Wednesday, 13 June, 2018, 9:01pm

Shares of ZTE tumbled in Hong Kong and Shenzhen trading on Wednesday after the Chinese telecom equipment maker agreed to pay a combined US$1.4 billion in fines, as well as make changes in senior leadership and replace its board of directors, as part of a deal to lift US sanctions.

The stock plunged 42 per cent to HK$14.96 in Hong Kong at the close, after being suspended for nearly two months. Trading volumes also surged, with the number of shares that changed hands jumping to about 15 times its 180-day average based on Bloomberg data.

Its Shenzhen-traded stock slumped by the 10 per cent daily cap to 28.18 yuan. Less than 0.1 per cent of ZTE’s shares available for public trading changed hands for the day, indicating that the sell-off is likely to continue.

While ZTE’s Hong Kong-listed shares may have already fallen to a reasonable level in the one-off shake-out, its mainland-traded stocks will probably drop by another 28 per cent before the slump ends, according to Citi Securities. The sanction is likely to lower its future profit by 50.3 billion yuan (US$7.85 billion) in coming years, the brokerage said.

Investors agreed.

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“ZTE’s shares will probably drop to around above 21 yuan and that’s where bargain hunters will probably begin to jump in,” said Wei Wei, a trader at Huaxi Securities in Shanghai. “It’ll take a while for the company to recover from the blow and it’s very likely to post a loss this year.”

The US government announced in April it had banned US companies from selling crucial hardware and software components to ZTE for seven years, as it failed to take action against staff who were responsible for violating trade sanctions against Iran and North Korea. ZTE chairman Yin Yimin later conceded that the ban had put the company into “a state of shock”.

In an editorial, China’s state run Xinhua News Agency criticised ZTE for breaching US laws in reckless pursuit of business interest and said all Chinese companies should draw a lesson from it. The Chinese government devoted lots of resources in negotiation with the US and eventually bailed out the company, it said.

In a research note on Wednesday, Citic Securities analyst Gu Haibo set a price target of 20.34 yuan for ZTE’s shares, saying sales will probably decrease by 25 per cent in China and Asia this year and 40 per cent in Europe and America. That is expected to cut the company’s annual profit by 8.4 billion yuan, he said.

The sanction came at a time when ZTE’s business was already showing signs of picking up. After returning to profit in 2017, the company posted a 39 per cent increase in net income for the three months through March, according to a quarterly result released in late April.

Still, ZTE said in an exchange filing on Tuesday night that it will rework the first-quarter report after a full appraisal of the impact of the US sanctions, and will also replace its board of directors.