ZTE Shares Plummet After Agreeing To Pay $1.4 Billion In Penalties

ZTE shares fell as much as 41 percent just after it agreed to settle the penalties amounting to $1.4 billion imposed by the U.S. on its business. It has also agreed to overhaul its management just so it could resume its operations.

Bloomberg reports that while ZTE’s move will prevent its imminent collapse, its investors are worried how the Chinese company could regain its credibility in global markets especially now that it is changing its management. Moreover, there is no guarantee that the U.S. won’t impose further sanctions.

In April, the U.S. government imposed a seven-year ban on ZTE that disallowed the company from purchasing crucial American technology components for its products. IBTimes learned in the third week of May that the ban was expected to cause ZTE to lose around 20 billion yuan or US$3.1 billion.

The situation was so bad that ZTE reportedly thought of selling off its smartphone business because it was not operating and was incurring losses day by day. Without the components made by its American partners, ZTE couldn’t manufacture handsets and sell them to consumers.

But now that ZTE is resuming its operations, other problems may have fallen into its lap. “While the nightmare is now over, ZTE will likely have to deal with many changes. We expect significant near-term selling pressure and a volatile stock price,” analysts Edison Lee and Timothy Chau at Jeffries said.

“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 opined.

The only silver lining is ZTE’s established reputation in the industry. The Shenzhen, Guangdong-based company is China’s second-largest telecoms equipment maker. Moreover, it has raked in big revenues prior to the ban. So it’s possible for the company to bounce back sooner or later as long as it resumes its usual operations. It’s also worth noting that China is already a leader in 5G technology mainly due to ZTE and Huawei, and the smartphone industry is currently transitioning to 5G, according to Android Authority.