2018 was a year to forget for ZTE, or at least a year that will keep its management up at nights for many more years to come. That goes for both current and former executives, with the two being entirely different groups of people; after all, the United States made sure of that.
After escaping the kiss of corporate death by the skin of its teeth, ZTE went on to figure out a plan on how to recuperate from a crippling denial order from the stateside Department of Commerce which was hanging over its figurative head for close to half a year. Its solution was taken right out of hardcore capitalist's playbook, an ironic turn of events for a firm that's majority-controlled ba a state-backed entity. Not for much longer, however.
This week, Zhongxingxin Telecom announced its intentions to divest a significant stake in ZTE, dumping as much as three percentage points of the company's total active share count. The decision will see it lose the status of ZTE's majority owner, which it doesn't view as a consequence so much as the main goal of the incoming move. The plan was revealed in a stock exchange filing dated Wednesday, March 13.
The latest turn of events is somewhat surprising given how Zhongxingxin Telecom — whose logo is almost indistinguishable from that of ZTE — stuck with its troubled asset throughout 2018. While the decision to dump it could not have been easy, its eventual timing is far from optimal. Granted, there's never a good time for cutting one's losses on a multi-million-dollar scale but up until the very end, no Western analyst seriously entertained the idea of ZTE being dumped by its largest stakeholder
A parent? Predecessor? Both?
The relationship between Zhongxingxin Telecom and ZTE is a long and complicated one but in essence – Zhongxingxin is ZTE and ZTE is Zhongxingxin. Well – was.
Formerly known as the Zhongxing Telecommunication Equipment Corporation, a name it held for the first dozen years of its existence (with some variations), ZTE adopted its current moniker as an abbreviation of the previous one when it went public in 1997 on the Shenzen Stock Exchange. That moved proved to be so lucrative that it actually filed for another IPO in 2004, this time in Hong Kong, further diluting its ownership but without jeopardizing the controlling stake held by Zhongxingxin which was established in the meantime.
While the differences between the stock markets of the U.S. and China are both vast and intricate, far too much to allow for explaining in a few hundred words, for most intents and purposes, a Western observer can think of Zhongxingxin as ZTE's holding company, which is more or less how it acted for some two decades now.
The firm was originally was founded in 1985 by investors with close ties to China's Ministry of Aerospace Industry, so while it was never an official part of the communist apparatus, that's precisely how it was viewed. Given the complex structure of China's economy, ZTE fared better as a state-owned company operating in the private segment with the primary goal of turning a profit.
Following Zhongxing's disclosure of its divestment plans, ZTE stock plummeted up to 7.6-percent in Shenzen and 5.6 points in Hong Kong. The soon-to-be-former parent will sell two-percent of ZTE Class-A stock within the next 90 days and is presently considering the option of using another point of equity to pay for a subscription to the ICBCCS SHSZ 300 exchange-traded fund, i.e. the units it's offering.
What happens next is anyone's guess; ZTE certainly has some breathing room as far as U.S. pressure is concerned seeing how Huawei is now a much bigger target but without its long-time owner, the firm is likely to have even more trouble taking out affordable loans. Cynics would say that's a good thing since ZTE is already massively overleveraged, having lost billions in missed opportunities over the last twelve months, while also paying $1.4 billion in fines to the U.S. government due to its consistent trade embargo violations. And while that may be a clever joke, no one at ZTE is laughing right now.