ZTE's Profit Dives 65% as It Tries to Move Past U.S. Ban

(Bloomberg) -- ZTE Corp.’s quarterly earnings slid 65 percent, underscoring a difficult recovery from U.S. sanctions that briefly brought China’s No. 2 telecommunications gear vendor to a standstill.

The state-backed company reported net income of 564.5 million yuan ($81.2 million) for the quarter ended September, compared with its own projection for almost break-even to 1.02 billion yuan. Revenue for the period slipped 14 percent to 19.3 billion yuan.

ZTE is recovering from a months-long U.S. Commerce Department ban on purchases of American technology, including components needed to produce its smartphones and networking equipment. Washington agreed to lift that moratorium -- punishment for violating and lying about sanctions on exports to Iran and North Korea -- only after ZTE agreed to replace its board and senior management and paid more than $1 billion in penalties.

Investors however remain cautious on Chinese corporations as U.S. tensions escalate. ZTE has since initiated a number of efforts to lower costs, including restructuring a smartphone arm that’s become a drag on the overall business. Beijing has also reportedly asked the country’s biggest telecom carriers to favor ZTE when purchasing equipment. In August, the company predicted net income of 24.2 million yuan to 1.02 billion yuan in the September quarter, a wide range that reflected its uncertain prospects.

ZTE is now counting on emerging markets to offset setbacks in developed markets like Australia, which have blacklisted ZTE and rival Huawei Technologies Co. ZTE’s cheaper products enjoy an edge in developing countries.

“Although the U.S. is trying to convince its allies not to use Chinese equipment, emerging market governments generally seem less concerned and trust China more,” Jefferies analysts Edison Lee and Timothy Chau wrote this week. They’re predicting a 5 billion yuan potential profit for 2019.

ZTE’s shares listed in Hong Kong and Shenzhen have about halved since the ban was imposed in April. The company has lost roughly $17 billion in valuation year to date.

To contact Bloomberg News staff for this story: Gao Yuan in Beijing at ygao199@bloomberg.net

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