Business hurt by 'delay in overseas projects, low gross profit margins'

A ZTE Corp stand at an international smart cards and radio frequency identification exhibition in Beijing. The telecom company forecast a net loss of up to 2 billion yuan ($318 million) in the third quarter of the year, compared with 299 million yuan in profits in the same period of 2011. [Photo/China Daily]

ZTE Corp, China's second-largest telecoms equipment maker, saw a major fall in its share price on Monday after warning over the weekend that third-quarter losses could be as much as 2 billion yuan ($318 million).

The company is scheduled to report its latest earnings on Oct 25. Issuing the warning to the Shenzhen Stock Exchange on Sunday, officials blamed the expected loss on a delay in some overseas projects and low gross profit margins of contracts in Europe and Asia, which reduced revenues and profits in the quarter.

However, the company said it still expected to be profitable for the full year.

The estimated 1.9 billion yuan to 2 billion yuan of net losses in the third quarter compares with net profits of 299 million yuan in the same period last year, and 245 million yuan in the first half.

Shi Lirong, its chief executive officer, said on Monday that the world's fifth-largest telecom equipment vendor had come to "its worst point in history".

"ZTE has a clear and correct market strategy, however, when it comes to execution, our management has demonstrated some flaws," he said.

ZTE's shares fell 10 percent, the daily limit of trading stocks on Shenzhen Stock Exchange, closing at 9.45 yuan on Monday.

Shenzhen-based ZTE and cross-town rival Huawei Technologies Co Ltd, the world's second-largest telecom gear maker, are fighting weakened sales as some clients postpone spending on telecom equipment.

Both their outlooks have also been muddied by a recent US congressional report that urged US firms to stop doing business with them due to potential security concerns, but both have denied the report's allegations.

As early as 2006, ZTE has followed a strategy called "big countries, big telecom carriers".

The strategy demands the company focus on expansion in some big countries and regions, such as the European and North American markets, Japan and the BRIC countries (Brazil, Russia, India and China).

In addition, it aims to strengthen cooperation with multinational telecom operators.

Adhering to the plan, ZTE achieved good progress both at home and abroad.

Shi reiterated his confidence in the strategy, but pointed out that ZTE had suffered from some loose internal controls toward winning contracts.

"We have to put profit at the center of our focus," he added.

In contrast to pursuing a larger market presence worldwide by offering cheaper products and services, a method that ZTE has adopted in recent years, the company now plans to slow its expansion pace.

Shi said ZTE would be allocating more resources to profitable markets and products, and start retreating from markets and products where ZTE has poor performance.

According to the company statement to the stock market, ZTE will shut any offices that have been making losses without any prospect of future profits, consolidate product lines that offer little development potential, and take better control of its workforce size, and conduct organizational change.

The company will also optimize operational efficiency by reducing selling costs and research and development expenses, it added.

"We hope to be out of this net loss as soon as possible," Shi said, without giving any exact prediction when.

In a previous interview with China Daily, Chairman Hou Weigui said ZTE hopes to become one of the world's top three telecom equipment makers by surpassing Nokia Siemens Networks and Alcatel-Lucent SA in terms of sales.

Shi confirmed on Monday that ZTE still expects to realize that by 2015.

"We are at the worst stage in history, but we are going to overcome our hurdles and do better," he added.

"The market still has strong demand for telecom and networking equipment. There are plenty of opportunities for ZTE."

The domestic market could be the biggest revenue driver for ZTE in upcoming months.

China Mobile Ltd, the world's biggest telecom carrier by subscriber numbers, has already kicked off large-scale trials for TD-LTE 4G technology in 13 Chinese cities.

ZTE, according to Shi, acquired the largest share of TD-LTE contracts from China Mobile.

In the US market, where ZTE now faces tough political pressure, Shi said he was optimistic about the future development, despite the recent congressional ruling.

"Our mobile phone business is not affected and it is hopeful for ZTE to make breakthroughs in the US market in the future," he said.

Meanwhile, according to a research note issued by Bank of America Merrill Lynch on Monday, ZTE's earnings would bottom out in the third quarter.

The note said ZTE's performance would recover starting from the fourth quarter this year and maintained a "buy" rating for its shares.

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