ZTE outperforms on US agreement

Business | Bloomberg 13 Jul 2018

ZTE Corp's (0763) shares surged 25 percent in Hong Kong after it inked an agreement with the Trump administration to allow the company to resume doing business with American suppliers, meeting a key Chinese government demand amid escalating tensions between the world's two largest economies.

The Chinese telecoms gear-maker signed an escrow agreement with the Commerce Department and a ban on US technology purchases will be lifted as soon as ZTE deposits US$400 million (HK$3.12 billion), the department said. A person familiar with the matter said the escrow payment should be completed within a day.

ZTE last month took a major step forward in meeting the White House's conditions by sacking its entire board and appointing a new chairman. Its new management faces the challenge of rebuilding trust with phone companies and corporate customers. But the company is said to be facing at least US$3 billion in total losses from a months-long moratorium that choked off the chips and other components needed to make its networking gear and smartphones.

Shares in ZTE, which is currently operating on a temporary waiver that expires August 1, soared as much as 25 percent in Hong Kong. Its Shenzhen-listed stock rose by its 10-percent daily limit. Several of its suppliers, including Zhong Fu Tong Group, also rose sharply on mainland Chinese bourses.

"As ZTE is finally near the end of the tunnel, we believe its current stock price incorporates an overly pessimistic view on the settlement," Edison Lee and Timothy Chau, analysts for Jefferies, wrote in a note. "Assuming ZTE will be able to get back into business next week, we believe the market will start focusing on its earnings prospects."

ZTE representatives had met with Commerce Department officials to discuss a path forward for the deal, people familiar with the meeting said.

"Once the monitor is selected and brought on board, the three-pronged compliance regime - the new 10-year suspended denial order, the US$400 million escrow, and the monitor - will be in place," said the Commerce Department. "The ZTE settlement represents the toughest penalty and strictest compliance regime the department has ever imposed in such a case. It will deter future bad actors and ensure the department is able to protect the United States from those that would do us harm."

The Trump administration in April announced a seven-year ban on US exports to ZTE, saying the firm violated sanctions agreements by selling American technology to Iran and North Korea. The ban forced ZTE to announce it was closing down.

Then President Donald Trump changed course in May, saying he was reconsidering penalties on ZTE as a personal favor to Chinese President Xi Jinping. Later that month, his administration announced it would allow the firm to stay in business after paying a US$1.3 billion fine, changing its management and providing "high-level security guarantees."

A group of US lawmakers remains concerned about ZTE's threat to US national security and wants legislation to restore harsher penalties.

Talks have started on legislation, aimed at balancing concerns that ZTE presents a security risk with efforts to get it back into business.

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