Management revamp, stiff penalties to avoid US sanctions dampen investor sentiment

Shares of ZTE Corp plummeted on Wednesday, after the Chinese telecommunication equipment maker said it will have to pay at least $1 billion in penalties and reshuffle its management in exchange for the United States government's decision to lift a crucial ban.

The Hong Kong-listed shares of ZTE fell more than 41 percent to HK$14.96 ($1.91) on Wednesday, the lowest in a year, as it resumed trading after a two-month suspension. Its stock in Shenzhen also slid by the daily maximum of 10 percent.

The company said in a filing late on Tuesday that besides paying a $1 billion fine and setting aside $400 million in escrow, it would replace its board and senior management at both the parent company and affiliate ZTE Kangxun Telecom Co Ltd. The actions are part of a broader settlement agreement that will allow it to resume operations.

ZTE will have to terminate all current members of its senior leadership, or those above the senior vice-president level, the company added.

The Chinese company was sent into a state of shock in April when the US Commerce Department imposed a ban on purchases of US technology in punishment for its violations of an earlier settlement related to sanctions infringements.

ZTE accounts for about 10 percent of the global telecom gear market and is the fourth-largest smartphone vendor in the US. The company was crippled by the ban, because US companies provide an estimated 25 percent to 30 percent of components in its smartphones, telecom gear and other products.

Investment bank China International Capital Corp Ltd said in a research note that such moves will have a limited impact on ZTE's business, given that it remains the world's fourth-largest telecom equipment maker and it has a relatively steady relationship with its clients.

"It will not lead to big fluctuations in ZTE's short-term performance," CICC said, maintaining its 40 yuan ($6.24) target price for the company.

CITIC Securities Co Ltd said a reasonable price for ZTE is 20.34 yuan, lower that its more than 31 yuan price before the two-month suspension.

Xiang Ligang, CEO of telecoms industry website Cctime, said the darkest days for ZTE are over, and it is likely that the Chinese tech player will shift back to its normal track as soon as possible.

ZTE has relationships with a string of US suppliers and supports nearly 130,000 high-tech jobs in the US.