June 19, 2018 / 6:57 AM / a year ago

Breakingviews - ZTE becomes an even cheaper stock option

A woman stands outside a building of ZTE Beijing research and development center in Beijing, China June 13, 2018. REUTERS/Jason Lee

HONG KONG (Reuters Breakingviews) - ZTE is becoming a harder option to price. The Chinese telecommunications equipment maker’s future rests in the hands of American politicians. It lost another $1.4 billion in value on Tuesday morning after the U.S. Senate passed a measure that would yank a lifeline thrown by the Trump administration. The company’s fate isn’t sealed yet, though.

Just two months ago, ZTE was left for dead. The U.S. Commerce Department decided to stop U.S. suppliers from selling their wares to the Shenzhen-based company after finding it had broken the terms of a previous settlement for violating sanctions on trade with Iran and North Korea. Without American vendors, it’s not clear ZTE could keep building networks or smartphones. Amid tense trade negotiations with Beijing, President Donald Trump deflected that punishing blow, opting instead to impose a fresh $1 billion fine and require that ZTE’s board and top brass be fired.

That wasn’t harsh enough for many U.S. legislators, who consider the company a security threat. The Senate voted overwhelmingly to attach an amendment to a defence spending bill that would effectively reinstate the supplier ban, plus other punitive steps.

To be enacted, however, the House of Representatives would first have to agree to incorporate the ZTE provision into a jointly agreed proposal with the Senate. Republicans in the larger chamber have been reluctant to defy Trump, and upcoming elections in November will have many worried about retribution from the president. The proposal also would need to be veto-proof, with a two-thirds majority.

If ZTE evades this latest volley, there could be real upside for investors; the company should be well-positioned to benefit from operators upgrading to ultra-fast 5G wireless technology. Nor is the downside bottomless; Chinese state-controlled enterprises own 30 percent of ZTE, and Beijing might intervene to put a floor under the company’s value.

Given the escalating tit-for-tat tariffs with China – Trump is now seeking another $200 billion of inbound goods to tax – it would be fair to ask just how invested in saving the company the president still is. On the other hand, such a public rebuke from his own party would be embarrassing. In some ways, that makes ZTE a $12 billion bet on one man’s willingness to defend his ego.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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