ZTE shares slump to three-year low on earnings fears, EU spat

HONG KONG Tue Jul 10, 2012 1:42am EDT

A ZTE company logo is seen at the company's exhibition pavilion during the CommunicAsia information and communications technology trade show in Singapore June 19, 2012. REUTERS/Tim Chong

A ZTE company logo is seen at the company's exhibition pavilion during the CommunicAsia information and communications technology trade show in Singapore June 19, 2012.

Credit: Reuters/Tim Chong

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HONG KONG (Reuters) - Shares of ZTE Corp (0763.HK), the world's No.5 telecommunications equipment maker, hit a three-year low on Tuesday on worries about earnings and concerns over a subsidies dispute between the European Union and China, analysts said.

ZTE's Hong Kong-listed shares fell by as much as 8 percent to HK$13.00 in morning trade, the weakest level since late March 2009. The stock has fallen about 45 percent so far this year.

Trading volume to the lunch break was about a quarter more than its average 30-day volume, Thomson Reuters data showed.

ZTE, along with bigger rival Huawei Technologies Co Ltd HWT.UL, has been hurt by weak global telecom spending and stiff competition in the mobile phone business in China, the world's biggest market by subscribers.

"Some people in the market had been overly bullish about the Chinese market. ZTE has done well in the LTE business in China, but that didn't translate to significant profits," said Michael Li, an analyst with Everbright Securities, in Hong Kong.

LTE, short for long-term evolution, is a fourth-generation wireless technology that China Mobile (0941.HK) has been building and upgrading to replace its third-generation technology, which is deemed inferior to other Chinese carriers.

ZTE, the world's fourth-largest handset vendor, has also been suffered from competition in the handset business, particularly in China, where more of its one billion subscribers have been switching to low-cost smartphones.

The company surprised in the first quarter when it reversed three quarters of losses, but analysts question whether this was sustainable and several expect a fall in first-half net profit.

ZTE is still expected to post a net profit of 3.2 billion yuan ($502 million) for full-year 2012, based on Thomson Reuters I/B/E/S, up from 2.06 billion yuan in 2011, but some analysts cautioned that the forecast appeared bullish.

Analysts said a spat between the European Union Commission and China over subsidies could also affect ZTE.

European Union officials have said the EU would like to take action against Huawei and ZTE on the grounds that they receive illegal subsidies that allow them to sell equipment at lower prices. Both companies and the Chinese government have denied such claims.

"If such an investigation really takes place, it will have a negative impact on this business," said Nomura analyst Huang Leping.

The Financial Times reported this week that Beijing had threatened to retaliate against a range of European Union industries if Brussels pressed ahead with the investigation.

($1 = 6.3714 Chinese yuan)

(Reporting by Lee Chyen Yee and Clement Tan; Editing by Richard Pullin)

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