ZTE faces tougher second half after boosting Q2 profit 63%

ZTE, China s second-largest telecommunications gear maker, posted a 63% rise in second-quarter net profit on Monday, lifted by strong demand for telecommunications equipment.

ZTE, which recently scrapped a plan to float shares in Hong Kong amid worsening market conditions, said net profit for the quarter rose to 106.16 million yuan ($12.82 million) from just 65.04 million yuan in the year-ago period.

But analysts foresee a tougher second half as wireless operators curtail spending on networks, after the rapid expansion of past years, and focus on hoisting their bottom line.

"The rise in income, operating profit and net profit was due to the growth in the company s sales," ZTE said in its interim report posted on the Shenzhen stock exchange s Web site, www.cninfo.com.cn.

ZTE, which postponed a listing on Hong Kong s exchange this year after initially delaying a $450 million offering from late 2002, saw turnover rise 55% to 3.7 billion yuan in the second quarter. The company did not say if there were plans to revive its IPO effort.

For the first half, net profit rose 45% year-on-year to 194.78 million yuan.

Analysts said they had expected at least a 30% jump in first-half earnings but reckoned growth over the rest of the year would slacken.

"ZTE s full-year earnings are only likely to rise about 20%, although that should be better than its domestic rivals," said analyst Dai Chunrong at China Securities.

"Its July-to-December earnings won t grow as fast because of a higher base from the second half of last year."

Well-placed for recovery

ZTE was one of the first four domestic shares to attract investment under a landmark scheme known as Qualified Foreign Institutional Investor (QFII) when Swiss bank UBS bought an undisclosed amount of its stock in July.

The QFII admitted overseas investors into massive but restrictive primary stock and debt markets in China that had previously been limited to domestic players.

China s domestic share market is Asia s second largest, after Japan, in terms of market capitalization.

UBS Warburg initiated coverage of ZTE with a "buy" rating, although it expects the company to post just 7.5% growth in net profit for 2003, according to Reuters Research.

China Securities Dai added: "As one of the larger players among the domestic players, ZTE is better placed to take advantage of an industry recovery this year on the back of the booming economy."

Spending on wireless systems has slowed in China from the high levels of recent boom times.

But demand for network infrastructure is still healthier in China, ZTE s main market, than it is almost anywhere else, supported by the world s largest mobile subscriber population and a rock-bottom user penetration rate of about 15%.

Ericsson said in late July that China and India were expected to lead the Asian region s growth.