ZTE Corp (Shenxhen, P.R.C.) and China Unicom (Beijing, P.R.C.), China’s second largest telecommunications equipment maker and carrier respectively, reported third quarter net profit that missed expectations, with both companies grappling with pressured margins.
ZTE posted a second straight fall in quarterly profit mainly due to the weakness in the euro and a delay in value-added tax rebates, while China Unicom's profit was up by a worse-than-expected 21% as it doled out subsidies to attract more 3G users.
For ZTE, it made its name from selling equipment to telecom carriers, but has been diversifying into consumer devices by making cellphones and smartphones, similar to its larger homegrown rival Huawei Technologies (Shenzhen, P.R.C.).
ZTE’s net profit hit $46 million in July-September, down from a $76.1 million a year earlier and missing an average forecast of $65.4 million as per five analysts polled by Thomson Reuters.
"The main reason for the (ZTE) fall this time is due to non-core operations, which is foreign exchange losses and tax refunds," said Huang Leping, an analyst with Nomura Securities.
ZTE gets over half of its revenues from overseas markets, such as Europe and emerging Asia, with a weak euro contributing less to its profits since the company reports its financials in yuan, which has been strong.
ZTE has been benefitting from a government policy that allows technology-related companies to enjoy a low 3% VAT rate for its qualified software related sales, instead of a standard 17% rate, but that scheme expired at the end of 2010. Hence, for the most of this year, ZTE's profits were pressured by a lack of the tax refunds, resulting in two straight quarters of profit falls.
However, China's ministry of finance announced a new incentive policy in mid-October this year, which is roughly similar with the old one. Analysts expect ZTE's earnings to improve from now on with the new scheme and spending by China's telecom carriers, such as China Mobile and China Unicom.
"It (The incentive) has been delayed, so that fourth quarter earnings will be very strong," says Huang. "China telecoms are spending since the smartphone market is going quite strongly."
In a separate statement on Thursday, China Unicom reported a net profit of $253 million for the July-September quarter, up 21.2% from a year earlier, based on Reuters' calculations using the nine-month figures it announced.
The result was lower than an average forecast of $269 million from four analysts.
"We think Unicom is best leveraged to 3G growth in China, with its superior WCDMA technology. We also expect 3G growth in the fourth quarter to accelerate as the company rolls out new low-end 3G smartphones," Samsung Securities said in a report.
(Editing by Anshuman Daga and Jon Loades-Carter)