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Global telecoms giant ZTE sees gold in Chinese roots

ZTE company logos are seen at an international software and information services exhibition in Nanjing, Jiangsu province September 6, 2012.
ZTE company logos are seen at an international software and information services exhibition in Nanjing, Jiangsu province September 6, 2012.

By Lee Chyen Yee

HONG KONG (Reuters) - China's ZTE Corp, which helped bring the telephone to millions of homes during the Deng Xiaoping era, is counting on a new generation of tech-savvy smartphone users to drive at least $7.5 billion of 4G network projects and elevate its sagging fortunes.

Shenzhen-listed ZTE, founded in the mid-1980s, clinched its first major overseas contract in Bangladesh in the mid-1990s. Since then, it has been aggressively expanding overseas and challenging telecoms equipment manufacturers such as Ericsson and Alcatel-Lucent in emerging markets from Asia to Africa.

But years of rapid overseas investment and chasing global market share at the expense of profitability are finally taking their toll on the world's No.5 producer of telecoms gear. ZTE is now returning to its Chinese roots, eyeing 4G network contracts from domestic mobile operators China Mobile Ltd, China Unicom Ltd and China Telecom Corp Ltd.

"The China market is like a gold mine as telecom operators are cash-rich," David Dai Shu, a spokesman for ZTE, told Reuters. "It is a top priority for us by country."

China's three mobile operators plan to spend a combined 345 billion yuan ($56 billion) this year on network expansion. That includes investment in 4G, which promises rapid data downloads for millions of mobile users holding Apple Inc's iPhones or Samsung Electronics' Galaxy phones.

Hong Kong-listed China Mobile, the world's top carrier with 715 million subscribers, is forking out 41.7 billion yuan from its total spending of 190.2 billion yuan for this year to build 200,000 4G base stations covering more than 100 cities.

The Chinese government is expected to issue 4G licenses later this year.

Smaller rival China Unicom said on March 21 it planned to spend 5 billion to 10 billion yuan annually on 4G once it gets a license. China Telecom has yet to announce its 4G investment.

ZTE, which has flagged three profit warnings in the past year and is poised to post its first-ever annual loss for 2012, is likely to grab the bulk of contracts along with its cross-town rival Huawei Technologies Co Ltd due to its state-backed status, analysts said.

Policy lender China Development Bank has extended a $20 billion loan to ZTE, though that was mainly for contracts in emerging markets under government-to-government aid programs, the analysts said.

"They (ZTE) will get contracts everywhere, but it's in China where I would expect that they are going to get the uplift to their margins and therefore their underlying profitability," said Neil Juggins, a telecom analyst from JI Asia.

ZTE is expected to rake in a net profit of 2.37 billion yuan this year, according to a Reuters poll of 10 analysts.

For 2012, the company is forecast to post a net loss of 2.67 billion yuan, the poll shows. That would be the first annual loss for ZTE since it went public in Shenzhen in 1997 and in Hong Kong in 2004.

The firm, which has lost around half its market value since January 2012, will announce its 2012 results on Wednesday.

MISSTEPS

ZTE has spent the past decade pitting itself against Ericsson, Huawei, Alcatel-Lucent and Nokia Siemens in its fight for a bigger share of the global telecoms equipment market.

In some cases, ZTE's prices are so low that other competitors, such as Ericsson and Huawei, would rather walk away than match its bids, industry sources said.

"These guys (ZTE) were bidding at dirt-cheap prices. ZTE was making losses on all those bids for their new businesses," said Gaurav Jain, a telecom analyst at IDC in New Delhi, referring to the Indian market.

Officials at Ericsson and Huawei were not immediately available for comment.

"Over the past few years, we have not been the lowest bidders for some projects in countries such as India," said ZTE's spokesman Dai, declining to elaborate.

"The telecom equipment sector is experiencing a price downtrend due to telecom carriers trying to keep costs down because of the current global economic climate," Dai said.

Low pricing, as well as government probes from the Philippines to the United States and telecom regulation changes in markets such as India, have added to ZTE's woes and weighed on its bottom line.

ZTE said its expected 2012 net loss was mainly due to a delay in some overseas projects and low-margin contracts in markets such as Africa and South America.

Mixed messages from management have also dulled investor appetite for its stock.

After issuing a profit warning for the first nine months of 2012, executives told analysts in October that ZTE would turn profitable for 2012. But a few months later, the firm warned of a net loss for the year.

"We have a small number of ZTE shares, but I'm not buying any more as we've been misled by the company before," said a China-based fund manager, declining to be identified as he was not authorized to speak to the media.

Some industry executives are also wondering whether all that huge capital spending announced by the telecom carriers would materialize this year as continued global economic worries curtail telecom spending.

"I'm a little conservative for the first half of the year because we still need to see capex announcements from China's telcos for this year and whether that spending will follow through for this year," said Chris Ye, a telecom analyst with Mirae Asset Management, which owns ZTE shares.

(Editing by Ryan Woo)

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