ZTE's Health

For curiosity, I did a simple comparison of UTStarcom vs. its cross-town competitor ZTE, based on publicly available information. (There is little information on Huawei, which is privately-held.) Data are for the past 12 months and in millions, where applicable.

	UTStarcom	ZTE
Revenue	2450	2616
Profit	-482	115
GrossMargin	18%	34.5%
Cash	657	377
Debt	397	large
Mkt Cap	1040	3014
P/E	-5.08	26.12
P/S	0.42	1.15

Not that I care too much about it, but I see ZTE in big trouble ahead, financially. On the face of it, it is in much better health (product diversity/profit/margin/etc.) than UTStarcom, which has had its own share of problems in recent years. However they are in completely opposite trajectory. While UTStarcom is strengthening its finance and heading for profitability, ZTE's relying on government credit to finance the overseas projects for its clients. Does that sound familiar? (Hint: Lucent/Nortel for MCI/WorldCom). Too bad it may be the government-owned banks that will have to swallow the pill in the end.

ZTE's stock (000063.sz) has done poorly over the years, even with the great global telecom boom during which ZTE and Huiwei has been supposedly grabbing market shares from western competitors. Now the competition is becoming even more fierce. Its gross margin is coming down quarter over quarter. Even the expected 3G and IPTV roll-out in China may not be enough for the company. Imagine what will happen if the market cools down!