ZTE Corp.’s shares cratered after it agreed to pay at least $1 billion in penalties and overhaul its management as part of a sweeping settlement agreement that allows it to resume business after a two-month hiatus.
China’s second-largest telecoms equipment maker fell 42% as it resumed trading in Hong Kong following a suspension since April, when the U.S. imposed a ban on purchases of vital American technology in punishment for Iran sanctions violations. Its Shenzhen stock slid by the daily maximum of 10%. That wiped about $2.7 billion off ZTE’s market value Wednesday.
ZTE (ztcoy), a focal point of a U.S.-China trade dispute, agreed to pay $1.4 billion in total penalties, including a lump sum payment of $1 billion and a suspended penalty of $400 million, and replace its board. While that averts an imminent collapse, investors remain concerned about the distraction of a management overhaul and its ability to regain credibility in global markets. Larger rival Huawei Technologies also continues to gain market share in smartphones and networking. Meanwhile, there’s no guarantee U.S. lawmakers won’t come back with further sanctions.
“While the nightmare is now over, ZTE will likely have to deal with many changes,” analysts Edison Lee and Timothy Chau at Jefferies wrote in a note. “We expect significant near-term selling pressure and a volatile stock price.”
The U.S. Senate advanced legislation to restore penalties on ZTE, after President Donald Trump advocated for the Commerce Department settlement easing restrictions. The Senate voted 91-4 late Monday to begin debate on the National Defense Authorization Act, including an amendment that will keep restrictions on ZTE. The provision was included on a list of amendments that is backed by both Republicans and Democrats.
The Shenzhen, Guangdong-based company is likely to incur losses of at least $3 billion as a result of the U.S. action. Analysts at Jefferies gave a price target of HK$14.41 in a research note, down from more than HK$25 before the suspension. Citi analysts targeted HK$15.
Commerce Secretary Wilbur Ross said the legislation that would restore penalties on ZTE is not a certainty as the measure still needs final approval. “We’ll see if it does” get through Congress, Ross said in an interview in Washington on Tuesday.
The U.S. blocked ZTE’s ability to buy from U.S. suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations. That choked off supply of the chips and other components it needs to make networking gear and smartphones, forcing the company to grind to a halt just weeks later.
ZTE, in its filing, detailed extensive steps it will take to comply with the settlement. The settlement calls for replacing the entire boards of both parent ZTE and subsidiary ZTE Kangxun within 30 days of the order, as well as terminating all current members of senior leadership at both companies.
It will also complete and submit nine audit reports of its compliance with U.S. export control laws. It plans to assess the full impact of the April 15 U.S. export denial order and disclose an updated financial reports.
“ZTE should have a significant loss in FY18E due to the penalty in addition to near-term operational challenges due to management change and increased overseas growth uncertainties,” Citi analyst Bin Liu wrote.