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Nikkei Markets

ZTE shares suffer record drop as trading resumes with rocky path ahead

HONG KONG (Nikkei Markets) -- Shares of ZTE suffered a record percentage drop in Hong Kong on Wednesday as trading resumed after the Chinese telecommunications-equipment provider agreed to pay a $1.4 billion penalty to lift a ban on the supply of American-made components to the company, which had brought it to the verge of a collapse.

The stock was down 39.4% at HK$15.50 as of 11:53 a.m. in Hong Kong. Its Shenzhen-listed shares fell by the day's 10% limit on that exchange to 28.18 yuan ($4.40). ZTE shares in both markets have been on a halt for almost two months.

The U.S. Department of Commerce determined in April that the company had made "false statements" to its Bureau of Industry and Security over a period of time in relation to actions it was taking to comply with penalties that were previously imposed on ZTE, due to a violation of U.S. sanctions on Iran and North Korea. The move to lift the ban on ZTE has also become a hot political issue in the U.S., with a group of Senators seeking to reverse President Donald Trump's decision to save ZTE, by using an amendment to a bill on national defense.

Under its latest agreement with the U.S., ZTE said it will pay a penalty of $1 billion and an additional $400 million toward a suspended penalty into an escrow, replace its entire board and terminate senior management personnel who were in some way responsible for the conduct that led to the ban on component supplies to ZTE.

While the company's moves have ensured it will remain in business and secure the components from American suppliers that are crucial to its operations, some analysts see a path forward for ZTE that is loaded with challenges.

Securities broker Jefferies, which had slashed its April target price on ZTE by more than 60% as the events unfolded, wrote in a note on Tuesday that the company's "road to recovery will be long and bumpy" and that the company could see "significant near-term selling pressure and a volatile stock price."

 

"While the nightmare is over now, ZTE will likely have to deal with many changes," including installing a board and top management and significantly steeping up its internal control systems. "The export ban will likely last two months in the end, and ZTE has lost roughly 1.5 months of revenue at a minimum."

Analysts at China Galaxy International said in a report Wednesday that the company has sufficient cash without the need for any external fundraising for now, and that the U.S. export ban will be removed immediately after it pays the $1.4 billion penalty.

"However, at this stage, ZTE will wait for the auditor to calculate the losses related to the suspension of operations and fines related to the export ban," they wrote in a report. "We share the view that ZTE's business will be affected and that it will take time to resume normal operations after the U.S. government removes the ban."

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