ZTE shares dive on Q3 warning

ZTE Corp, China's second-largest telecoms equipment maker, saw a major fall in its shareprice on Monday after warning over the weekend that third-quarter losses could be as much as 2 billion yuan ($318 million).

The company is scheduled to report its latest earnings on October 25. Issuing the warning to the Shenzhen Stock Exchange on Sunday, officials blamed the expected loss on a delay in some overseas projects and low gross profit margins of contracts in Europe, Asia and in China, which reduced revenues and profits in the quarter.

However, the firm said it still expected to be profitable for the full year.

The estimated 1.9 billion yuan to 2 billion yuan of net losses in the third quarter compares with net profits of 299 million yuan in the same period last year, and 245 million yuan in the first half.

Shi Lirong, its chief executive officer, said on Monday that the world's fifth-largest telecom equipment vendor had come to "its worst point in history".

Speaking from Spain, he said: "ZTE has a clear and correct market strategy, however, when it comes to execution, our management has demonstrated some flaws."

ZTE's shares fell 10 percent, the daily limit of trading stocks on Shenzhen Stock Exchange, closing at 9.45 yuan on Monday.

Shenzhen-based ZTE and cross-town rival Huawei Technologies Co Ltd, the world's second-largest telecom gear maker, are fighting weakened sales as some clients postpone spending on telecom equipment.

Both their outlooks have also been muddied by a recent US congressional report that urged American firms to stop doing business with them due to potential security concerns, but both have denied the report's allegations.

As early as 2006, ZTE has been determined to follow a strategy called "big countries, big telecom carriers".

The strategy demands the company focus on expansion in some big countries and regions, such as the European and North American markets, Japan and the BRIC countries (Brazil, Russia, India and China).

In addition, it aims to strengthen cooperation with multinational telecom operators.

Adhering to the plan, ZTE achieved good progress both at home and abroad.

Shi reiterated his confidence in the strategy, but pointed out that ZTE had suffered from some loose internal control toward contract winning.

"We have to put profit at the center of our focus," he added.

In contrast to pursuing larger market presence worldwide by offering cheaper products and services, a method that ZTE has adopted in recent years, the company now plans to slow its expansion pace.

Shi said ZTE would be allocating more resources to profit-earning markets and products, and start retreating from markets and products where ZTE has poor performance.

According to the stock market statement, ZTE will shut any offices that have been making losses without any prospect of future profits, consolidate product lines that offer little development potential, and take better control of its workforce size, and conduct organizational change.

The company will also optimize operational efficiency by reducing selling costs and research and development expenses, it added.

"We hope to be out of this net loss as soon as possible," Shi said, without giving any exact prediction when.

In a previous interview with China Daily, Chairman Hou Weigui said ZTE hopes to become one of the world's top three telecom equipment makers by surpassing Nokia Siemens Networks and Alcatel-Lucent SA in terms of sales.

Shi confirmed on Monday that ZTE still expects to realize that by 2015.

"We are at the worst stage in history, but we are going to overcome our hurdles and do better," he added.

"The market still has strong demand for telecom and networking equipment. There is plenty of opportunities for ZTE."

The domestic market could be the biggest revenue driver for ZTE in upcoming months.

China Mobile Ltd, the world's biggest telecom carrier by subscriber number, has already kicked off large-scale trials for TD-LTE 4G technology in 13 Chinese cities.

ZTE, according to Shi, acquired the largest share of TD-LTE contracts from China Mobile.

In the US market, where ZTE now faces tough political pressure, Shi said he was optimistic about the future development, despite the recent congressional ruling.

"Our mobile phone business is not affected and it is hopeful for ZTE to make breakthroughs in the US market in the future," he said.

According to a research note issued by Bank of America Merrill Lynch on Monday, ZTE's financial result is about to hit its bottom in the third quarter.

The note said ZTE's performance would recover starting from the fourth quarter this year and maintained "buying rating" for ZTE shares.

shenjingting@chinadaily.com.cn