U.S. suppliers to ZTE may find more demand from China firm's rivals

(Reuters) - Other customers may make up sales that U.S. suppliers to ZTE Corp 000063.SZ lose due to a U.S. government ban on doing business with the Chinese phone and network equipment maker, industry insiders and analysts said on Tuesday, as some of the worst-hit stocks recovered ground.

A ZTE smart phone is pictured in this illustration taken April 17, 2018. REUTERS/Carlo Allegri/Illustration

The U.S. Department of Commerce on Monday banned sales of components to ZTE for seven years after China’s No. 2 telecom equipment maker breached an earlier agreement on Iranian sanctions, sending investors scrambling to determine which U.S. companies were losing business.

Shares of Acacia Communications Inc ACIA.O, which counts ZTE as a major customer, on Tuesday rose 3 percent to $26.43 but was still far off Friday's $40.03 close. Oclaro Inc OCLR.O rose 5 percent.

“To the extent business to ZTE might be ‘lost’ it may not be

permanent if other customers pick up the share,” wrote analyst Stacy Rasgon from Bernstein. “However, in the near term there could of course be some disruptions,” and a U.S.-China trade dispute could escalate.

ZTE makes handsets and equipment for networks, and Piper/Jensen analyst Troy Jensen recommended stocks including Oclaro and Lumentum Holdings Inc LITE.O, since they both also are suppliers to ZTE rival Huawei Technologies Co Ltd [HWT.UL]. "We believe Huawei will gain customers at ZTE's expense," he wrote in a note.

Telecom equipment maker FiberHome Telecommunication Technologies Inc 600498.SS also could gain from ZTE's loss, analyst Jun Zhang from Rosenblatt Securities said.

ZTE suppliers NeoPhotonics Corp NPTN.N, Inphi Corp IPHI.N, and Finisar Corp FNSR.O all have broad customer bases that will help them absorb any fallout, analysts said, and shares in those companies ended Tuesday close to or above Friday's close.

ZTE sources Remote Radio Unit (RRU) and Radio Frequency chips for its wireless base station from U.S. vendors including Analog Devices Inc ADI.O and Xilinx Inc XLNX.O, which both rose more than 2 percent.

It gets its cellphone baseband chipset from Qualcomm Inc QCOM.O and cellphone RF chips from Qorvo Inc QRVO.O.

ZTE itself may struggle to find replacements for physical components from U.S. suppliers and be forced to turn to cheaper products from Taiwan and China, potentially affecting performance of its devices, said Yunxiang Sun, a China-based analyst with Soochow Securities.

He named chips produced by MediaTek Inc 2454.TW, Spreadtrum Communications Inc and Accelink Technologies Co Ltd 002281.SZ as possible alternatives.

“Other suppliers can provide cheap ones that are not so powerful as American vendors,” he said.

But ZTE could face a potentially inescapable problem for its handsets if it cannot use the Android software from Alphabet Inc's GOOGL.O Google. The order may bar Android use, and the companies are discussing the matter, a source familiar with the situation said.

Some industry players said they hoped that might point the way to ZTE resolving the issue with Washington by negotiation.

“We hope the parties involved can come to a quick and just resolution to limit any potential disruptions,” said Analog Devices spokesman Gerald White.

Acacia, the biggest victim of the news on Monday, said it was suspending affected transactions and assessing the impact.

NeoPhotonics declined to comment on the components it supplies to ZTE while Xilinx, Qorvo did not immediately respond to request for comments.

Additional reporting by Stephen Nellis; Editing by Patrick Graham, Peter Henderson and Cynthia Osterman