June 13, 2018 / 6:40 AM / 2 months ago

Breakingviews - New ZTE regime could climb out of big hole

HONG KONG (Reuters Breakingviews) - ZTE is back to life, but faces a tough rehab. The Chinese telecommunications company lost nearly $3 billion in market value after its reprieve from a death sentence imposed by the Trump administration. That suggests concerns about a clean management sweep. If, however, ZTE can find decent leadership and stay out of trouble – big ifs, for sure – a 5G rollout holds real promise.

The inside of a ZTE smart phone is pictured in this illustration taken April 17, 2018. REUTERS/Carlo Allegri/Illustration

After confirming a settlement announced earlier by the U.S. Department of Commerce, ZTE’s shares resumed trading again on Wednesday for the first time in two months. They promptly tumbled about 40 percent in Hong Kong and the maximum permissible 10 percent in Shenzhen. Though authorities reversed their ban on American companies selling their wares to ZTE, the lifeline thrown to the smartphone and network equipment maker will take its toll.

ZTE must pay a $1 billion penalty and put another $400 million into escrow in case of further violations. It also agreed to overhaul its executive team and board. In the meantime, ZTE almost certainly lost contracts and suffered brand damage that will erode the bottom line.

The latest deal nevertheless ends another embarrassing saga for ZTE, assuming Congress does not step in to block it. In 2016, ZTE confronted a similar crisis when it was caught skirting U.S. sanctions on Iran and North Korea. The financial penalty again looks manageable: ZTE, 30-percent backed by Chinese state-controlled enterprises, had over $4 billion of cash on hand as of March.

A leadership vacuum and the broader reputational hits could be troubling. ZTE hasn’t said how it plans to replace as many as 40 members of its senior management team. Meanwhile, the company will need to move fast to regain confidence from suppliers and customers.

There is still a chance for a turnaround, though. As the world’s fourth-largest telecom equipment provider, and China’s second-largest, ZTE plays a pivotal role for operators racing to upgrade to 5G ultra-fast wireless technology. Between the time of the first sanctions violations pact and when the company was caught again earlier this year, its Hong Kong-listed shares doubled. If investors can tolerate the risk, there may yet be fresh reward.

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