* Q3 net loss 1.95 bln yuan - in line with company's fcast
* Q3 loss per share 0.57 yuan
* Shipped 19 mln smartphones in 9 mths, FY target of 28-30
* Shares in Hong Kong more than halved this year
By Lee Chyen Yee
HONG KONG, Oct 25 ZTE Corp
, the world's fourth-biggest maker of mobile phones
and fifth-ranked telecommunications equipment manufacturer,
reported its first quarterly loss - of $310 million - since
listing in Hong Kong in 2004, on shredded margins, project
delays and accounting changes in China.
Shenzhen-based ZTE, led by Shi Lirong, has also faced
accusations in a U.S. Congress committee report this month that
it - and local rival Huawei Technologies Co Ltd - is a
potential cyber security threat. Both ZTE and Huawei deny the
The company had warned of the impending loss - eight times
its first-half profit - earlier this month, triggering a 16
percent drop in its stock price on Oct. 15, a self-imposed 50
percent pay cut by executives, and warnings from Fitch ratings
ZTE has blamed the losses on delays in some international
telecom projects and a large number of low-margin contracts in
Europe and Asia, but said it expected to be profitable for the
full year. Net profit for the year is forecast at around 642
million yuan, according to a mean forecast from a Reuters poll
of 11 analysts since the company's mid-October profit warning.
Looking to pare back costs, ZTE has halved its capital
spending this year and will make further reductions next year,
executives told analysts late on Thursday.
"The company's fundamentals are not so strong and
transparency is also a concern," said a fund manager, who was
not authorised to talk to the media, so didn't want to be named.
ZTE, which competes with Ericsson, Alcatel-Lucent
SA and Nokia-Siemens in providing equipment to telecom
carriers, has been frustrated by project delays in the
high-margin African market. Some contracts were delayed by the
death of Ethiopian Prime Minister Meles Zenawi, though
executives said they were confident some of these would be
signed this year.
Telecoms gear contributes about half of ZTE's total sales,
while consumer devices make up about a third. The company, which
employs more than 80,000 people, generates more than half its
revenues outside China.
ZTE said revenues from selling telecom equipment to carriers
fell 5.2 percent in January-September, while consumer devices -
handsets, tablets and dongles - rose 15.4 percent on strong 3G
"Things should move up from here, in terms of profitability
and margins. We have to watch whether their telecom equipment
business overseas picks up," said Michael Li, an analyst with
Everbright Securities in Hong Kong.
Analysts have said ZTE should benefit from China Mobile
Ltd's expected spending next year to develop its 4G
network, though Barclays analyst Jones Ku said the operating
environment for ZTE's network business would likely remain
difficult, before carriers ramp up 4G spending beyond 2013.
"We maintain our view that the 4G theme is still too early
to play on the Chinese equipment names and expect ZTE's network
gross margin to remain under pressure over the next 3-4
quarters," he said.
ZTE said it had July-September negative net cashflow from
operating activities of 2.2 billion yuan, but hoped to turn that
around for the full year.
It said it expects full-year revenue of 90-93 billion yuan.
Like many in the consumer gadget business, ZTE wants to move
up the smartphone value chain with higher-end models like its
Grand series, but remains way behind Samsung Electronics Co Ltd
and Apple Inc in consumer recognition.
ZTE shipped 19 million smartphones in January-September and
has an annual target of 28-30 million, executives told analysts.
Smartphone margins were in the mid-20s percent for the 9-month
period, and the company said it wouldn't sacrifice those margins
by chasing volume sales.
Barclays' Ku said smartphone gross margins were unlikely to
recover soon given the price competition at the low-end of the
"The overseas network business is likely to become difficult
for ZTE in the near-term given the recent security allegations.
If these security concerns extend to its overseas handsets
business, there could be more downside for the stock," he said.
ZTE recently sold a majority stake in ZTE Special Equipment
Co (ZTEsec), a business that sells surveillance systems to
governments and law enforcement agencies.
An investigation by Reuters earlier this year found that ZTE
had sold to Iran's largest telecoms firm a powerful surveillance
system capable of monitoring landline, mobile and internet
communications. Reuters also reported that ZTE
had sold or agreed to sell Iran embargoed U.S. computer
equipment. The company said later it was curtailing its business
in Iran and had stopped looking for new customers there.
ZTE shares have more than halved this year, dropping the
firm's market value to below $5 billion. The benchmark Hang Seng
stock index has gained almost 18 percent over the same
period, while the CSI 300, made up of leading Shanghai
and Shenzhen shares, is down 2 percent.
ZTE has switched to a stricter way of logging new contract
revenues in its home market. It previously signed procurement
contracts with carriers' provincial branches, but now also
requires agreements with their head offices, increasing the time
needed to seal some deals, analysts said.