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Update: ZTE Shares Plunge as Trading Resumes After Costly U.S. Settlement

ZTE has halted main business operation in May after it was hit by a ban on doing business with American suppliers. Photo: VCG
ZTE has halted main business operation in May after it was hit by a ban on doing business with American suppliers. Photo: VCG

ZTE’s Hong Kong-listed shares fall 41.6% on Wednesday to close at HK$14.96, extending an opening loss of 36%

* Chinese telecom-equipment maker’s shares had been suspended since April 17, when Washington announced it would cut off ZTE from U.S. suppliers

(Beijing) — Shares of telecom-equipment maker ZTE Corp. plunged when trading resumed on Wednesday after a nearly two-month suspension, as investors fretted about the impact to the company’s business from a settlement with Washington, including a $1 billion fine, over illegal sales to Iran.

ZTE’s Hong Kong-listed shares fell 41.6% on Wednesday to close at HK$14.96 ($1.91), extending their losses after opening the day down 36%. The company’s Shenzhen-listed shares were down by their maximum 10% daily limit.

The shares have been suspended since April 17, when Washington first announced it would cut off ZTE from its U.S. suppliers as punishment for selling American-made equipment to Iran in violation of previous U.S. sanctions against the country.

The company had halted most of its operations shortly after the crisis began, but is likely to resume manufacturing of its core smartphones and networking equipment after paying the $1 billion fine that was part of a larger settlement with Washington, Jefferies analyst Edison Lee wrote in a note

“While the nightmare is now over, ZTE will likely have to deal with many changes,” Lee wrote. “First, it will need to install new top management and board of directors within 30 days. … Second, it will have to significantly step up its internal control systems, not just for export compliance but to develop the culture of the company to one that focuses on integrity, responsibility and compliance. Third, it will need to work with existing customers to strengthen their confidence and reward their loyalty and patience.”

Lee said that when all is said and done, ZTE will also lose at least 1.5 months of revenue.

ZTE announced the trading resumption late Tuesday, saying it reached an agreement with the U.S. Commerce Department that will lead to the lifting of the previous penalty, although Congress may block the deal.

In April, the Commerce Department banned American companies from selling components to ZTE for seven years. The U.S. imposed the penalty after ZTE broke an earlier 2017 agreement settling the company’s previous violation of trade sanctions against Iran. Such a ban would have been fatal to ZTE, which relies on U.S. companies such as Qualcomm and Intel Corp. for as much as a third of its components.

U.S. Commerce Secretary Wilbur Ross last week told CNBC a deal to reverse the ban will require ZTE to pay a $1 billion fine plus $400 million in escrow to cover any future violations. The company will also be required to replace its board of directors and executive team and to install a compliance team chosen by the U.S., Ross said in an interview on the cable business-news channel.

ZTE said in the Tuesday filings that it agreed to pay the $1.4 billion and replace all of its board members and those of wholly owned subsidiary ZTE Kangxun Telecom Co. Ltd. within 30 days of June 8. It will also replace all executives at or above senior vice president for itself and ZTE Kangxun and will remove any other executives involved in the wrongdoing.

The company will also hire an independent compliance officer to monitor and assess the operations of ZTE and its global subsidiaries to ensure compliance with U.S. export laws, ZTE said in the filing.

ZTE will try to resume business operations “as soon as practicable” after the U.S. lifts the ban, the company said. The ban will remain in place until the company pays the fine, the Commerce Department said Monday.

But the agreement still faces strong opposition from U.S. lawmakers who cite concerns over national security. The Senate will vote as soon as this week on legislation that would block the settlement, included as an amendment to a must-pass defense policy bill, Reuters reported.

The settlement was believed to be part of broader trade discussions between Beijing and Washington as U.S. President Donald Trump pushes for measures to create a more balanced bilateral trading relationship. Settlement of the ZTE issue was reportedly a prerequisite for China to finish its antitrust review of a pending deal that would see Qualcomm purchase Dutch chip maker NXP Semiconductors for $44 billion, according to previous media reports.

Contact reporter Yang Ge (geyang@caixin.com)

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