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ZTE's HK Shares Rise Despite Profit Warning

The Hong Kong-listed shares of ZTE Corp fell 5 percent early on Monday after China's second-largest telecom equipment maker issued a profit warning for 2012, but the stock quickly erased losses as investors bet on a strong outlook for 2013.

The stock fell as low as HK$14.02, its lowest since Jan. 8, before erasing losses to rise as much as 0.9 percent to HK$14.90, outperforming a flat benchmark Hang Seng Index.

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"Of course the market reacted negatively this morning," said Leping Huang, analyst from Nomura Equity Research. "Investors had expected some loss but not so big."

"Our main focus is the capex outlook for China's 4G in 2013," Huang said, adding that any weakness in the stock price may be a buying opportunity.

ZTE warned on Sunday of a net loss of up to 2.9 billion yuan ($467 million) for 2012 due to project delays and the non-renewal of contracts.

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It said it expected to return to profitability in the first quarter of 2013 due in part to its sale of Shenzhen ZTE NetView Technology Co., Ltd., which generated investment income of up to 880 million yuan.

Some analysts had a more prudent view.

"We remain sceptical. We indicated that we would turn more bearish on ZTE on continued margin erosion," Macquarie Equities Research wrote in a research note.

"We would prefer to wait for solid evidence of execution."

UBS said the recent share price rally was driven more by sentiment than fundamentals. "We suggest investors stay cautious at current levels before further clarity on the industry environment emerges," it added.

Credit Suisse maintained its "Outperform" rating on ZTE due to strength from China 4G TD-LTE network builds, resumption of African equipment contracts, and better smartphone profitability, as well as a strategy to focus on profitability, giving up lower-margin smartphone orders in the domestic market.

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On Monday, cross-town rival Huawei Technologies, the world's No.2 telecom equipment maker and sixth largest mobile phone vendor, posted a 33 percent rise in net profit for 2012, reversing a fall in 2011 thanks to new telecom projects and smartphone sales.