China’s ZTE Says Q1 Profits May Collapse

Chinese telecommunications equipment maker ZTE warned Tuesday that its first-quarter net profit could be wiped out, thanks partly to reduced spending by Chinese operators.

ZTE’s net profit will drop by “50 percent to 100 percent” from the first quarter of 2005, it said in a filing with the Hong Kong stock exchange. The company didn’t offer a projection for first-quarter revenue.

Last year, ZTE reported a first-quarter net profit of 230 million renminbi (US$28.6 million). The company had been expected to better that this year with a profit of 281 million renminbi, according to an April 7 forecast from Deutsche Bank.

ZTE blamed the expected shortfall on Chinese operators who reduced their capital spending during the first quarter of 2006. In addition, some of its overseas contracts have not “fully performed,” it said, without saying which ones.

Seasonal adjustments in capital expenditure shouldn’t come as a surprise to a vendor such as ZTE, which maintains close relationships with China’s state-owned operators, according to Ted Dean, managing director of BDA China, a telecommunications consulting firm in Beijing.

ZTE executives may have assumed that China would be closer to issuing third-generation (3G) mobile licenses by now, and expected to see operators begin spending on 3G equipment, Dean said. “If that were the case, that might have had a significant impact on them,” he said.

China is widely expected to issue 3G licenses later this year, but government officials have yet to announce when that will happen. As a result, Chinese operators haven’t begun to purchase 3G equipment for their networks, Dean said.

Wireless infrastructure products accounted for about 41 percent of ZTE’s total revenue during 2005.

-Sumner Lemon, IDG News Service

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