Bourse Queries Cash-Flush ZTE’s Need to Raise Extra Billions

Chinese telecom giant ZTE Corp. has announced plans to raise billions of yuan to fund its 5G chip development projects and replenish its capital, but stock market regulators are questioning whether this is necessary.

On Tuesday, the Shenzhen Stock Exchange inquired about the necessity of Shenzhen- and Hong Kong-listed ZTE’s plan to raise up to 2.6 billion yuan ($395 million) in a private placement. The company raised 11.5 billion yuan in a February private placement and apparently had some 43.5 billion yuan in cash at end of September, according to the inquiry document (link in Chinese) from the bourse.

ZTE announced (link in Chinese) on Nov. 17 its plan to raise 2.6 billion yuan from up to 35 investors in private share sales. About half of the proceeds will be used for the development of 5G chips and the other half will be used to replenish liquidity, the company said.

Meanwhile, ZTE has agreed to buy an 18.8% stake in one of its subsidiaries from two state-backed investment vehicles — Guangdong Hengjian Xinxin Investment Partnership Enterprise and Shenzhen Huitong Rongxin Investment Co. Ltd.

ZTE plans to fund the deal by issuing new shares and selling them to the two companies. This complex deal has also drawn the attention of the bourse.

In September, a ZTE Microelectronics Technology Co. Ltd. shareholder sold a 24% stake in the company to Shenzhen Renxing Technology Co. Ltd., a wholly owned ZTE subsidiary. The same day, Hengjian Xinxin and Huitong Rongxin agreed to provide a total of 2.6 billion yuan to help fund Renxing’s purchase.

Then, in October, Renxing sold a 10.1% stake in ZTE Microelectronics to Hengjian Xinxin for 1.4 billion yuan, and sold an 8.7% stake to Huitong Rongxin for 1.2 billion yuan. On Nov. 17, when ZTE announced its latest private placement plan, it also said it wanted to purchase the 18.8% ZTE Microelectronics stake from the two companies.

In response to the complex deal, the Shenzhen Stock Exchange asked ZTE to disclose the shareholding structures of Hengjian Xinxin and Huitong Rongxin and explain if ZTE or its associates helped fund their equity acquisition deal with Renxing.

Upon completion of the deals, Hengjian Xinxin will hold 0.97% stake in ZTE, while Huitong Rongxin will have a 1.75% holding in ZTE, according to ZTE’s filing with the bourse.

ZTE is supposed to respond to the bourses’ inquiries by Dec. 1.

Meanwhile this week, ZTE has faced difficulties overseas. The U.S. Federal Communications Commission (FCC) affirmed its decision to designate ZTE as a national security threat over concerns that telecommunications gear made by the Chinese company could be used for spying.

Such a move reflects the U.S. telecom regulator’s goal of driving ZTE and Huawei Technologies Co. Ltd. from the country’s market.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

Download our app to receive breaking news alerts and read the news on the go.