U.S. Politics Is the ABC for ZTE

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China’s ZTE has narrowly escaped death, only to become living proof of the way political risk can dominate a stock’s fortunes.

The Hong Kong-listed shares of the Chinese telecom-equipment maker dropped about 40% Wednesday, in their first day of trading after a nearly two-month suspension. It has been in dire trouble since April, when the U.S. Commerce Department banned American companies from selling components to ZTE, which also makes smartphones. The Commerce Department said ZTE had breached an agreement made last year to resolve its sanctions-busting sales to North Korea and Iran.

A view of ZTE’s logo at the company's headquarters in Shenzhen, China.

A view of ZTE’s logo at the company’s headquarters in Shenzhen, China.


Photo:

stringer/epa-efe/rex/shutterstoc/EPA/Shutterstock

The company received a lifeline last week when the U.S. agreed to lift that ban in exchange for a $1 billion fine and an overhaul of its management.

That doesn’t mean ZTE is out of the woods. The U.S. could reimpose the ban in the next 10 years if ZTE fails to honor the agreement. There is also now a bipartisan move in Congress to undo the ZTE deal: Senior Republican senators have indicated President

Donald Trump

might not block such a step.

All of this is likely to make customers reluctant to deal with ZTE, especially overseas—critical, given that more than 40% of its revenue last year came from outside China. Developed-country governments are increasingly warning about the potential national-security risks of handing important infrastructure contracts to Chinese companies such as ZTE. British cybersecurity officials warned U.K. phone carriers in April to stay clear of ZTE’s equipment and services, citing concern about potential sabotage from Beijing.

After Wednesday’s plunge, ZTE’s Hong Kong-listed shares trade at a cheap-looking 10 times this year’s expected earnings, according to S&P Global Market Intelligence. But analysts have barely adjusted their estimates yet. It may take some time for ZTE to pick up steam, following the recent disruption of its operations and a complete revamp of its management. And with a sharply lower share price, it may also be more costly for it to fund its planned $6.7 billion investment in 5G technology, a potential growth engine for equipment companies. ZTE said in January it planned to raise $2 billion by issuing shares in Shenzhen: It is unclear if that will still go ahead.

Investors should hesitate before re-connecting with ZTE.

Write to Jacky Wong at JACKY.WONG@wsj.com

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