ZTE 4Q12 sales crashed 18%

Check out what to blame.

According to Barclays, ZTE announced preliminary 2012 results Sunday night, disclosing estimated figures for sales, China-GAAP gross margin and net loss. The company expects 4Q12 sales should be down by 18% y/y to around Rmb23bn, implying full year sales of around Rmb84bn, which is below our full year estimate of Rmb90.5bn and consensus of Rmb91.9bn (Bloomberg).

4Q12 China-GAAP gross margin down by 11pts y/y to around 20% (versus 18.2% in 3Q12), due to a large number of low-margin contracts in Africa, South America, Asia and the domestic market.

Here’s more:

ZTE also estimated full year net loss at a range of Rmb2.5-2.9bn (versus net profit of Rmb2.06bn in 2011), significantly below consensus of a Rmb317mn net profit. This translated into a further loss of Rmb800mn to Rmb1.2bn in 4Q12.

1Q13 outlook: While no detailed figures were given, the company expects it can make profit in 1Q13 helped by investment income from recent disposal of Shenzhen ZNV and better cost control. The company estimated investment income of Rmb820-Rmb880mn from the disposal of Shenzhen ZNV (announced on 28 Dec) and this will be recognized in the 1Q13 reporting period.

However, the company also cited its outlook on 1Q13 is subject to uncertainties such as competition, macro environment and the effectiveness of cost controls during 1Q13.

Our view: We see this disappointing preliminary results as consistent with our cautious view that the operating environment remains difficult for ZTE. We expect the share price to be under pressure after the recent strength on speculation of earlier 4G and improving market sentiment.

We maintain our view that 4G capex will only ramp up in 2014 at the earliest after the 4G licenses in 2H13. That said, we do not expect any major recovery in its 1H13 core earnings, especially when we expect its smartphones gross margin will continue to be under significant pressure due to increasing competition

Read-across to the sector: We expect ZTE’s disappointing results are mostly not because of company-specific issues and are indicative of a difficult network operating environment both in China and overseas markets.

We expect Comba (UW) and CCS (UW) will experience a similar environment and suggest investors to be cautious on the stocks despite recent strength on improving sentiment.