ZTE Stock: Long Winter Ahead 中兴股价的冬天或将很长
Amid a growing wave of setbacks for telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063), I thought it might be interesting to look at the company’s stock and whether it might be a good time to buy shares for a firm that seems to have good long-term potential despite its recent string of negative news. A quick look at the numbers leads me to conclude that despite losing nearly 60 percent of their value over the last 52 weeks, ZTE shares are probably still overpriced and are unlikely to make any major gains from their current levels over the next year.
The bad news just keeps coming for this embattled company, which is already being attacked on numerous fronts in the US and Europe over concerns that its equipment could be used for spying, and that its products are unfairly subsidized by Beijing. Let’s look quickly at the latest bad news, which has a group of 17 US lawmakers calling on the Obama administration investigate ZTE for allegedly selling a sophisticated telecoms surveillance system to Iran. (English article) The group is concerned that the surveillance system may have contained sophisticated US-made computer parts, which would violate US sanctions against Iran.
This controversy erupted earlier this month (previous post), and comes after the US was already probing ZTE and crosstown rival Huawei over concerns that their equipment could be used for spying by Beijing. ZTE and Huawei are also being investigated by the European Commission over allegations that they receive subsidies from Beijing in the form of tax breaks, low interest loans and other government policies, giving them an unfair advantage over global rivals like Ericsson (Stockholm: ERICb) and Alcatel-Lucent (Paris: ALUA).
If all that wasn’t bad enough, an intellectual property alliance called Alliacense has just announced it has filed a complaint alleging patent violations against ZTE and 12 other companies with the US International Trade Commission. (Alliacense announcement) It’s obviously too early to say what the outcome of any of these actions against ZTE will be, but presumably the company will have to spend lots of time and resources defending itself and could ultimately also face punitive action in one or more of the cases.
Despite all that, I still personally think that ZTE has good longer-term prospects, as it tries to diversify away from its traditional telecoms equipment business into smartphones and other consumer products that are less sensitive. But in the process of that diversification, the company has seen its profits drop sharply as it sacrifices margins in a bid to gain market share.
Even after the steep drop in its share price over the last year, its price-to-earnings ratio for 2012 still stands at about 11 times. That’s actually not a very high number compared to rivals like Ericsson, whose PE stands at 15 times. But considering that ZTE’s profit is likely to fall further in the next year, its stock will also probably drop as well to keep its PE ratio at current levels. Investors seem to understand this, with a growing number taking short positions in ZTE stock. On the whole, I still like this company over the longer term if it continues to gain smartphone market share; but over the next 12 months, its stock will face stiff resistance as its profits erode and it fights battles on many fronts in overseas markets.
Bottom line: ZTE’s stock is unlikely to rise over the next 12 months, as it faces eroding profits and a wide array of conflicts in the US and Europe.
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