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UPDATE 2-ZTE, China Unicom miss quarterly profit forecasts
October 27, 2011 / 12:41 PM / in 6 years

UPDATE 2-ZTE, China Unicom miss quarterly profit forecasts

* ZTE’s Q3, 9-month net profit down on forex losses

* Delay in tax refunds also pressured ZTE’s bottomline

* China Unicom’s Q3 net up 21 percent (Adds quotes, details, China Unicom results)

By Lee Chyen Yee

HONG KONG, Oct 27 (Reuters) - ZTE Corp and China Unicom , China’s No.2 telecommunications equipment maker and carrier respectively, reported third quarter net profit that missed expectations, with both companies grappling with pressured margins.

ZTE posted a second straight fall in quarterly profit mainly due to the weakness in the euro and a delay in value-added tax rebates, while China Unicom’s profit was up by a worse-than-expected 21 percent as it doled out subsidies to attract more 3G users.

For ZTE , it made its name from selling equipment to telecom carriers, but has been diversifying into consumer devices by making cellphones and smartphones, similar to its larger homegrown rival Huawei Technologies .

It has been grabbing market share from bigger rivals such as Nokia Oyj and Samsung Electronics Co Ltd by selling its phones, including its Android-powered smartphones, at lower prices.

The Shenzhen-based company’s net profit hit 299.3 million yuan ($46 million) in July-September, down from a 483.9 million yuan a year earlier and missing an average forecast of 416 million yuan as per five analysts polled by Thomson Reuters.

“The main reason for the (ZTE) fall this time is due to non-core operations, which is foreign exchange losses and tax refunds,” said Huang Leping, an analyst with Nomura Securities.

ZTE gets over half of its revenues from overseas markets, such as Europe and emerging Asia, with a weak euro contributing less to its profits since the company reports its financials in yuan, which has been strong.

ZTE has been benefitting from a government policy that allows technology-related companies like itself to enjoy a low 3 percent VAT rate for its qualified software related sales, instead of a standard 17 percent rate, but that scheme expired at the end of 2010.

Hence, for the most of this year, ZTE’s profits were pressured by a lack of the tax refunds, resulting in two straight quarters of profit falls.

However, China’s ministry of finance announced a new incentive policy in mid-October this year, which is roughly similar with the old one.

Analysts expect ZTE’s earnings to improve from now on with the new scheme and spending by China’s telecom carriers, such as China Mobile and China Unicom.

“It (The incentive) has been delayed, so that fourth quarter earnings will be very strong,” Huang said.

“China telecoms are spending since the smartphone market is going quite strongly.”

In a separate statement on Thursday, China Unicom reported a net profit of 1.61 billion yuan for the July-September quarter, up 21.2 percent from a year earlier, based on Reuters’ calculations using the nine-month figures it announced.

The result was lower than an average forecast of 1.71 billion yuan from four analysts.

China Unicom said the average revenue per user per month of mobile business was 47.4 yuan, up 9 percent from a year earlier, though analysts said the carrier’s ARPU could still be under pressure from giving out handset subsidies to attract 3G users.

“We think Unicom is best leveraged to 3G growth in China, with its superior WCDMA technology. We also expect 3G growth in the fourth quarter to accelerate as the company rolls out new low-end 3G smartphones,” Samsung Securities said in a report.

On Thursday, ZTE’s shares were up 5.7 percent, while China Unicom -- the only Chinese carrier to offer iPhones -- fell 0.62 percent, compared with the main Hang Seng Index’s 3.26 percent gain. (Editing by Anshuman Daga and Jon Loades-Carter)

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