One translation of ZTE’s Chinese name is “resurgence”. But renascent it is not. On Friday, China’s second-largest telecoms equipment maker by sales warned that first-half net profit could be down as much as 80 per cent from a year earlier. That implies almost break-even in the second quarter against Rmb642m in the same period last year.
A big chunk of the blame went on a cut in investment income and foreign exchange losses. That might be justified – ZTE generated almost Rmb1bn from holdings in its chip unit Nationz during the first half of last year, but it has continued to sell down shares in the Shenzhen-listed company since. Investment income from the holding was perhaps just Rmb100m over the past six months. And about a quarter of its sales are in euros, which have depreciated by one-sixth against the renminbi over the past year. Much of that should have been priced in, but the shares fell 16 per cent yesterday.
The crux of the problem is falling margins in ZTE’s mobile handset segment – supposedly the growth part of the company – which leaves little room for error in its core telecoms equipment business. But here big customers such as China Mobileand China Unicomhave delayed equipment contracts for the expansion of China’s homegrown network, for example, which ZTE was banking on.