Shareholders question who is to blame for the US ban that led to ZTE stock plunge

ZTE held shareholder meeting to approve a new board, a crucial step in meeting the conditions of a settlement agreement before the US can lift an export ban

PUBLISHED : Friday, 29 June, 2018, 1:27pm
UPDATED : Friday, 29 June, 2018, 4:28pm

Who should be blamed for ZTE Corp. landing in dire straits? Should the Shenzhen-based telecommunication equipment company buy back stock to prop up the share price, which has plunged more than 60 per cent after the US government slapped it with an export ban?

Shareholders posed those questions to management at its annual general meeting on Friday morning. Many left the two-hour gathering dissatisfied with the answers.

“I think the company should take more responsibility,” an individual investor who only gave her name as Li said as she left the meeting. “The management offered no concrete solutions at the AGM, which is quite disappointing to me.”

A full-time housewife, Li said she is sitting on a paper loss of about 170,000 yuan (US$25,715) after buying 10,000 shares of ZTE in April, right before the US barred the company from buying American components, including crucial parts like semiconductors that go into its smartphones. The denial order was imposed to punish the company for flouting the terms of an earlier settlement for illegal sales to Iran and caused ZTE to shut down major operations.

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Another investor, surnamed Wang, said management did not give shareholders enough time to address all of their concerns.

“They didn’t give me a chance to ask all the questions, the time was too short,” he said. “Regarding the export ban, the management should answer the question whether this was a natural or man-made disaster. I think it’s man-made … They kept emphasising external factors, yes, there are indeed external factors, but the main reason is they didn’t do their part properly.”

Wang said he owned “a lot of ZTE shares” but would not easily sell as he thinks the stock price is “undervalued” at current levels given its long-term outlook. “But if the US does not lift the ban, the outcome will be difficult to predict,” he said.

ZTE declined to comment on what transpired in the closed-door meeting, or the characterisation of the proceedings as told to the South China Morning Post by shareholders who attended the gathering. Management apologized to the shareholders, according to the investors who attended the meeting.

It is perhaps little surprise that management was not able to give shareholders definitive answers. The demand for accountability by investors is perhaps also a moot point, because the management and board, headed by Chairman Yin Yimin, are all on the way out.

As part of conditions of a new deal with the US Commerce Department, ZTE must replace its board and terminate all senior executives as well as anyone involved in the Iran violations within 30 days from June 7. All current board members will resign after new directors are elected.

At ZTE’s headquarters in Shenzhen’s Nanshan district on Friday, reporters were barred from the auditorium where the annual meeting was being held. A reporter from a local media outlet who tried to barge into the meeting was escorted out by security. The company laid out juice and biscuits in a side conference room and urged the reporters to rest there rather than brave the heat outside.

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Inside the auditorium, Yin said that as chairman of the company, he felt personally ashamed and was sorry for the economic losses caused to shareholders because of the plunge in the stock price, according to National Business Daily. Zhao Xianming, the company’s CEO, reportedly said that the company had maintained its core competencies, especially in research and development, despite the “unfortunate incident” and should return to normal quickly and recover losses once the ban is lifted.

ZTE paid an additional US$1 billion fine last week and is finalising the details of an escrow account for the US$400 million surety payment. The company is suffering losses of several million yuan per day, exclusive of other miscellaneous penalties due to breach of contracts with some clients.

It has also appointed a three-person team to oversee implementation of its settlement with the US government, which is working under conditions of high confidentiality and secrecy, after the company instructed all staff – even senior executives – to keep away from work that could decide the company’s fate.

Even as it works to comply with the conditions of the new settlement, other branches of the US government are working to tighten controls over ZTE.

The US Senate passed a defence policy bill that backs President Donald Trump’s call for a bigger, stronger military but would also repeal his deal to reopen Chinese telecoms company ZTE.

Meanwhile, the US House of Representatives on Thursday approved a spending bill for the US Defense Department that includes an amendment that bars the Pentagon from buying goods or services from Chinese telecommunications giants ZTE and Huawei.

Some investors are keeping their faith in ZTE.

Baillie Gifford & Co., which owns about 14.2 million shares of ZTE according to a March 31 filing, said it remains “enthusiastic long-term shareholders of the company on behalf of our clients, principally on the back of its massive efforts in R&D to accelerate the deployment of 5G technologies by the world’s leading mobile networks.”

“We are confident that the personal intervention of Presidents Xi and Trump shows a critical understanding of what is at stake here, and the company’s new management is most likely to ensure that the radical cultural change that would usually take years to occur, will happen with immediate effect,” the company said in emailed comments. “We believe that the risks of further such events are now much reduced.”

ZTE to replace board, fire senior management under US deal

Other foreign investors in ZTE include the California Public Employee's Retirement System (Calpers), Teachers Insurance & Annuity Association of America, the Bill and Melinda Gates Foundation Trust and the Texas Permanent School Fund, according to latest regulatory filings compiled by Bloomberg, a financial data provider.

Other foreign investors include the New Zealand Superannuation Fund Authority, Government Pension Investment Fund of Japan and the Swedish national income pension system.