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India ban hits ZTE’s Q2, resolution could boost H2

India ban hits ZTE’s Q2, resolution could boost H2

Hong Kong: India’s ban on Chinese telecoms equipment pulled ZTE’s second-quarter profit below market forecasts, though the rest of the year looks brighter on expectations the prohibition will be lifted.

ZTE’s sales in Asia outside of its key China market fell 19% to ¥5.2 billion ($770 million) in the first six months of the year, hit by the Indian ban that began earlier in the year over security concerns.

That contrasted sharply with all other regions, where sales rose by as much as 79% in Africa.

“To have India lift the ban will be very positive for ZTE," said Victor Yip, an analyst at UOB Kay Hian.

“India hasn’t been contributing much to the bottom line, and having that back again should swing things back to a more normal playing ground for them."

ZTE and crosstown rival Huawei Technologies have been two of China’s biggest export success stories in the high-tech sector, rising from relative obscurity over the last decade to become two of the world’s top sellers of wireless mobile network equipment.

ZTE reported a second-quarter net profit of ¥767.7 million ($112 million) versus ¥705 million a year earlier. The result lagged a consensus forecast of ¥835 million, according to five analysts polled by Reuters.

Net profit for the first half of the year excluding one-off items rose to ¥877.5 million, up from ¥783 million a year earlier and compares with a consensus forecast of ¥945 million.

Macquarie analyst Lisa Soh said ZTE’s revenue came in below her forecast, with core networking equipment sales up just 1%, while she had expected low double-digit growth.

ZTE and Huawei, along with global peers like Ericsson and Alcatel Lucent, suffered in 2009 during the global downturn when telecoms spending dipped sharply as companies delayed their spending plans.

ZTE took a further hit earlier this year when India — a $1 billion market for the company — cited security concerns in banning the import of Chinese telecoms equipment, just as its carriers were preparing to build out expensive third-generation (3G) mobile networks.

That development has weighed on ZTE’s shares, which are down nearly 20% this year, worse than a 4% drop for the broader market and versus a rise of about 20% for Ericsson.

But following intervention from Beijing, Indian media reported this week that the country’s telecoms regulator has approved the sale of ZTE equipment to Reliance Communications, as the issue appeared to be near resolution.

Following an end to the stand-off, analysts expect ZTE’s sales to gain momentum in the second half of the year.

Daiwa Research analyst Joseph Ho forecast that following resumption of sales, India would account for about 6% of ZTE’s total sales in the second half of the year, about double the 3% in the first half.

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