ZTE Dives as U.S. Probe, Executive Shuffle Stoke Uncertainty

  • Company says it could face civil and criminal penalties
  • Shares plummet upon resuming trade since March 7 suspension

ZTE Corp. slumped the most in almost eight months after China’s second-largest maker of telecommunications gear resumed trade for the first time since the U.S. government alleged it violated trade sanctions with Iran.

The impact of the U.S. action was “highly uncertain” and it could face civil and criminal penalties, Shenzhen-based ZTE said in a statement. Its stock closed 10 percent lower in Hong Kong, its biggest decline since August. 

The Commerce Department in March barred exports to the Chinese company over allegations it re-sold goods to Iran, a ban that was suspended till June 30 after both sides opened negotiations. ZTE, which sells smartphones as well as networking gear throughout Europe and Asia, said it’s cooperating with the investigation but still can’t fully assess the impact and potential legal liabilities.

“The U.S. tends to give cues to other overseas markets, so that’s why investors might be concerned,” Fan Guohe, an analyst at Phillip Securities HK Ltd., said by phone. “Because the dispute may escalate to criminal charges, it’s on a whole new level of seriousness.”

Change at the Top

ZTE shuffled its top echelons this week, replacing its president and several other executives. Shi Lirong, the top executive over the past six years, ceded the helm to Zhao Xianming, who also became chairman of the board. While the changes were portrayed as part of regular leadership changes, Shi had been named in documents released by the U.S. that purported to show how ZTE had circumvented its restrictions.

On Wednesday, the company also reported a 2015 profit far lower than earlier estimated. Net income for 2015 was 3.21 billion yuan ($495 million), lagging the preliminary forecast of 3.78 billion yuan it made in January.

A ban on U.S. exports could affect its networking business, one of the world’s largest. The gear maker, whose shares had been suspended since March 7, relies on components from American companies including Qualcomm Inc. and Micron Technology Inc., according to data compiled by Bloomberg.

Still, ZTE and Huawei Technologies Co. are expected to become major beneficiaries as China and other countries roll out advanced high-speed wireless networks. 

“The sell-off today was overdone,” said Hao Wang, an analyst with SBI China Capital in Hong Kong. “The company’s leadership change and the U.S. issue is contributing to the uncertainty.”

“Over the longer term, ZTE’s business prospects in telecommunications remain strong,” he said.

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