Monday, February 24, 2020
Martin Hennecke

ZTE freefall shows there's no easy way out
Chinese telecommunications giant ZTE, which was hit by Donald Trump's sanctions, reached an agreement earlier this month with the US government to pay a US$1.4 billion fine.

However, shares in the troubled company slumped 42 percent when it resumed trading yesterday, becoming the top loser among Hong Kong stocks. Its turnover at one stage was also the highest, only to be surpassed later by Tencent Holdings.

It is not a good time for retail investors to buy into ZTE, albeit the sharp decline is greater than expected. And it won't be easy for the Shenzhen telecom stock to rebound either.

Investors holding ZTE A-shares are worse off since there is a circuit breaker in the mainland, meaning that they could face a 10 percent plunge in the share price every day until it bottoms out.

ZTE was found "guilty" of selling equipment to North Korea and Iran in violation of US sanctions. However, if its "guilt" had surfaced a few months later - after the North Korea-United States summit - the situation would have probably been less serious.

ZTE has 60 days to submit the US$1 billion penalty payment and has to pay an additional US$400 million in escrow within 90 days. Over a 10-year monitoring period, ZTE will have the opportunity to get the US$400 million back if it conforms to the strict agreement, which also requires the company to replace its entire board.

The agreement though is far from done and dusted, as it needs Congressional approval. Some members of Congress are meanwhile egging Trump to increase ZTE's punishment and further crack down on other Chinese tech firms.

Over the period when trading of ZTE's shares was suspended, several brokerage houses sharply revised their target price of the company to HK$15, or even HK$14.41 - and ZTE's shares almost reached that price yesterday. It's hard to say whether these houses will adjust their forecasts again if they feel their previous target price was too optimistic.

Although ZTE has 30 billion yuan cash in hand, which is expected to support its US component purchases, it must be badly burned after the sanctions, especially with its overseas business.

If you are unlucky enough to own ZTE shares, you would be better off cutting your losses, and for those who are thinking jumping in on the bandwagon: think twice.

Meanwhile, in sharp contrast, Semiconductor Manufacturing International rose 4.64 percent, despite the Hang Seng dropping 377 points. The moral is clear: China must develop its own chip industry and stop being dependent on US technology, in the aftermath of the ZTE debacle.

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