ZTE may have reached an agreement with the U.S. to resume business last week, but it will take a long time for it to recover from the temporary U.S. sanctions, Nomura said in a note last week.
The U.S. Department of Commerce allowed the company to resume business after it paid a US$1.4 billion penalty and it agreed to replace all senior management and it board of directors, it noted. The U.S. had previously ordered all U.S. companies to stop doing business with the Chinese telecommunications equipment maker after it allegedly violated sanctions on North Korea and Iran.
But U.S. President Trump had taken the highly unusual step of interfering in the regulatory process to save the company. Speculation has been rife that the ZTE reversal may have been related to the Trump Organization reportedly receiving as much as US$1 billion in financing from Chinese state-owned companies. The U.S. Congress is weighing whether to step in and impose tougher penalties on ZTE.
Even if tougher penalties aren’t reimposed, Nomura noted the company isn’t out of the woods.
“As its business has almost stopped entirely since the denial order was imposed on 15 April 2018, we believe the company’s revenue growth will inevitably be disrupted,” Nomura said. “We think it will take a long time for ZTE to recover, especially for the consumer business, where its smartphone market share may be taken by competitors.”
Nomura cut its 2018-20 revenue forecasts for ZTE by 8-9 percent and forecast a 1.06 yuan loss per share for 2018. It cut its 2019-20 earnings forecasts by 18-22 percent on the denial order’s impact and the “unprecedented” penalty.
It cut its target price for the Hong Kong-listed share to HK$16 from HK$27, based on 13 times 2019 earnings per share, down from 18 times previously. It kept a Neutral call.
For the Shenzhen-listed share, Nomura downgraded it to Reduce from Neutral and cut its target to 15.60 yuan from 28.50 yuan.
Nomura said that ZTE still has opportunities in 5G.
“As one of only four global telecom equipment vendors, ZTE has already made quite a few achievements in 5G-related technologies and products, which we think may help it to remain competitive in 5G,” it said. “However, we believe the company may face short-term turbulence.”
It noted that some overseas clients may seek penalties for delayed services, and some suppliers may want to negotiate for better terms.
But it added that while ZTE faces consumer-segment headwinds, most telecom operators would likely to continue to do business with ZTE as it is more difficult to switch to another supplier.