Investing

Nomura downgrades China's ZTE, cites slowdown in demand and tech war risks

Key Points
  • In a report on Tuesday, Nomura downgraded Hong Kong-listed ZTE shares from a "buy" rating to "neutral."
  • The bank says there would be a temporary slowdown in demand with the shift to 5G equipment not fully picking up, and warned of a risk of escalation in the conflict between the U.S. and China in the tech sector.
  • ZTE reported earnings on Monday that showed its third-quarter net profit jumped by more than four times — rebounding after U.S. sanctions were lifted.
People try out ZTE mobile phones on day two of the Mobile World Congress (MWC) Shanghai 2019 at the Shanghai New International Expo Center on June 27, 2019 in Shanghai, China.
VCG | Visual China Group | Getty Images

Japanese bank Nomura downgraded Chinese telecommunications firm ZTE, saying there would be a temporary slowdown in demand as the shift to 5G equipment has not fully picked up.

It also warned of a risk of escalation in the conflict between the U.S. and China in the tech sector.

In a report on Tuesday, Nomura downgraded Hong Kong-listed ZTE shares from a "buy" rating to "neutral."

"The investment cycle for the 4G network has almost come to an end, but demand for 5G base stations has not yet fully picked up, which we think is partially owing to high component cost and immature technology," it said.

Nomura highlighted key risks for the company that include "slower-than-expected 5G infrastructure spending by operators."

ZTE's major customers include the three state-run Chinese telcos — China Telecom, China Unicom and China Mobile. 5G licenses have been awarded to the three operators, which are now racing to roll out 5G services across China.

Nomura also cut its 2019 revenue forecast for ZTE by between 2% and 7%, taking into account slower-than-expected demand.

The downgrade comes after ZTE reported earnings on Monday that showed its third-quarter net profit jumped by more than four times — rebounding after U.S. sanctions were lifted. Last year, the U.S. banned the company from purchasing parts from American companies after it was caught illegally shipping U.S.-made goods to Iran and North Korea.

Its net profit surged more than 370% from a year ago to 2.66 billion yuan ($377 million), and net profit for the first three quarters of this year was 4.13 billion yuan.

But Nomura cited "escalation of the US-China trade conflict in the technology sector" as a key risk ahead.

Trade tensions between the U.S. and China have moved beyond tariffs to tech, with Washington placing Chinese tech giant Huawei on a U.S. blacklist in May, restricting the firm from purchasing American-made chips and software unless they received permission to do so.

In the latest development, the U.S. Federal Communications Commission plans to propose designating ZTE and Huawei as national security risks, and to bar them from a government subsidy program, according a Reuters report on Monday, citing U.S. officials.

ZTE, China's first state-owned telecom equipment company to go public, is listed in Hong Kong and Shenzhen. The Chinese telecoms equipment giant hires about 75,000 people around the world and operates in more than 160 countries. In the smartphone market, it competes with Apple and Samsung as well Chinese companies Huawei and Xiaomi.

ZTE's Hong Kong-listed stock surged about 4.5% by afternoon trade on Tuesday.

WATCH: What is 5G

VIDEO5:0305:03
What is 5G?

— CNBC's Todd Haselton contributed to this report.