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ZTE Shares Tumble Following Weak Forecast For 3rd Quarter

Shares of ZTE Corporation (SHE:000063) tumbled 15 percent Monday, following the weak third quarter forecast from the company. The Chinese telecommunications equipment maker‘s, profit estimates came amid fierce price competition in the industry, coupled with global economic slowdown. The Chinese firm was recently in the news, after a recent U.S. Congressional report linked the Chinese company to a national security threat for the U.S.

ZTE Shares Tumble Following Weak Forecast For 3rd Quarter

ZTE Corporation (SHE:000063) shares in Hong Kong declined to 10.64 Hong Kong dollars (US$1.37) on Monday, while on Shenzhen Stock Exchange; its shares were down by the exchange’s daily limit of 10%, at 9.45 Yuan (US$1.50) apiece.

The company’s biggest drop in three months followed its announcement over the weekend, that it expects a net loss of between 1.9 billion Yuan and two billion Yuan in the three months ending on Sept. 30. The weak estimates, along with analysts’ expectations that the already-tough business climate could get even more harsh for ZTE, China’s second-largest telecommunications equipment supplier, after Huawei Technologies Co., triggered the momentum of selling for the company’s shares.

The magnitude of the loss forecast by ZTE Corporation (SHE:000063) “was much worse than expected,” said Barclays analyst Jones Ku in a report Monday. “We believe the worst may not be over yet”.

“I’m quite doubtful that they’ll be profitable for the full year. They need to sell things to do that, but the fact is, sales for their flagship products – telecom equipment and handsets – will still be quite weak for the rest of the year,” said Michael Li of Everbright Securities in Hong Kong.

Earlier this month, the U.S. House intelligence committee, which has been investigating Huawei (SHE:002502) and ZTE for the past year, reported that the two Chinese companies pose national security risks for the U.S., as their equipment could be used by Beijing to spy on Americans. Though the companies have completely denied the allegations, the report may dent out new business opportunities in the U.S. telecommunications equipment market in the coming years. The U.S. currently accounts for only a tiny portion of the two firms’ revenue, but the lost opportunities in a market like The U.S. could limit their growth in the following years.

“From the (U.S) government’s perspective, the government may not allow Huawei or ZTE Corporation (SHE:000063) to participate in their national network infrastructure (projects), so definitely this will be an opportunity for the other three giants in the telecom equipment sector,” said Jessie Yu, a Singapore-based analyst at Frost and Sullivan.