Still in U.S. doghouse, ZTE faces pressure from fresh allegations

The company’s stock fell over 10% amid reports of a new $1 billion fine from the U.S., clouding its outlook as it claws its way back from an earlier clash with Washington

Key Takeaways:

• ZTE may face a U.S. penalty of more than $1 billion over alleged bribery in Brazil, a sum that could wipe out its 2024 profit
• The telecoms equipment maker’s diversification away from Western markets and AI-smartphone momentum may support its stock over the long term

By Xia Fei

As a poster child of collateral damage from the U.S.-China tech war in its early days, telecoms giant ZTE Corp. (0763.HK; 000063.SZ) has taken years to bounce back from a massive U.S. fine and other corrective measures for violating export controls and sanctions on Iran in 2017. But the high-profile clash may not be history just yet, despite ZTE’s many efforts to comply with an earlier settlement and maintain a low profile since then.

Last week, a Reuters report emerged that the company was once more being accused by the U.S. of wrongdoing, this time for making illegal bribes in Brazil, and that it was close to settling the matter in an agreement that could cost it over $1 billion. If true, that amount would be close to the $1.19 billion fine ZTE paid in 2018.

ZTE’s shares plunged by 13% in Hong Kong following the report, wiping out about half of their gains for this year. The stock is still more than double the depths it fell to at the height of its last tussle with the U.S. in 2018. But more downside could still lie ahead, depending on how chapter two of its latest clash plays out.

The company last Thursday acknowledged ongoing communications with U.S. regulators, saying its operations “remain normal,” as it pledged to “resolutely defend its rights and interests through legal means.” Management also unveiled a plan to buy back 19 million shares for up to 1.2 billion yuan ($170 million) to restore investor confidence.

According to Reuters, the U.S. Department of Justice launched an investigation into ZTE earlier this year over allegations that it may have violated the Foreign Corrupt Practices Act in South America and other regions. While details remain scant, the development raised an uncomfortable question: Can China’s second-largest telecoms equipment maker withstand another harsh U.S. penalty, along with the reputational damage and heightened scrutiny that would almost certainly follow?

A fine would pose a major initial blow, though not a crippling one. A penalty of $1 billion or more would nearly wipe out ZTE’s 2024 profit of 8.42 billion yuan and could constrain R&D. The company hasn’t been doing as well this year, reporting an 88% plunge in its net profit in the third quarter on ballooning operating costs. Its revenue is still growing, albeit slowly, rising 5.1% in the third quarter to about 29 billion yuan.

Those figure show ZTE’s current outlook hardly looks very strong, and any U.S. fine could further cloudy that picture. The company’s weak third-quarter showing owes partly to a painful transition happening in its home China market as spending on 5G networks slows after several years of rapid growth.

A bright spot for ZTE has been its sales to government and enterprise clients, which rose 109% in the first half of this year to account for more than a third of its revenue. But that segment’s gross margin was just 8.3%, versus a far higher 52.9% for its core carrier networks business, whose revenue fell 6% during the quarter. That combination caused carrier network revenue – a cash cow for ZTE – to fall below 50% for the first time in nearly a decade.

Post trade war repositioning

Despite the latest concerns, which resulted in last week’s selloff, there are reasons to believe ZTE may not be as devastated by punitive U.S. actions this time.

Both ZTE and rival Huawei Technologies were punished previously for selling U.S.-origin products to Iran and North Korea in violation of U.S. sanctions and export-control laws. Washington first moved against ZTE by threatening to cut off access to its key U.S. suppliers of components like chips and software – unless it accepted a stringent settlement. Huawei, by contrast, was directly banned from buying U.S. products with no settlement option.

Depending on its conditions, a new settlement could actually signal progress toward removing a long-standing regulatory overhang. ZTE has continued sourcing chips from Qualcomm and Intel and glass from Corning for its high-end smartphones, unlike Huawei, which is barred from such business. The company’s swift response in the latest clash – and its declaration that it will “defend its rights and interests” – suggests it’s confident of receiving a sympathetic ear from Beijing. That could be crucial, since the Chinese government is providing resources to tech companies to help them end their reliance on foreign technology.

Like many Chinese tech companies targeted by U.S. export controls, ZTE has steadily reduced its exposure to the U.S. and Europe, both in terms of suppliers and sales. Revenues from the U.S., Europe, and Oceania accounted for just 13% of its total revenue in the third quarter of 2025, down from 25% in 2017. More than 70% of its revenue is now domestic, as growth in Africa has stalled and the rest of Asia also declined, according to company disclosures.

ZTE may also deepen its reach across emerging Asian markets as those countries build up their telecoms networks. Both Huawei and ZTE have won several contracts to supply 5G equipment in Vietnam, Reuters reported in November. The company’s R&D spending rose from 11.9% of revenue in 2017 to nearly 21% in the first quarter of 2025, signaling a push to move up the value chain and become attractive to a wider range of customers.

Another overlooked development that could work in ZTE’s favor is its relationship with ByteDance, owner of TikTok. Sales of the Nubia M153, a ZTE-developed smartphone and the first to carry ByteDance’s agentic AI features, have surged since its December launch. Users can ask the phone’s Doubao AI assistant to edit photos, compare prices across shopping apps, and make investment decisions.

ZTE’s debt-to-equity ratio of 0.88 and free cash flow of $131.6 million in the first half of 2025 suggest it can absorb a penalty without an immediate liquidity crunch. Over the longer term, an equally important factor will be whether the company is subject to another probationary period, including U.S. oversight, similar to the one imposed after its earlier settlement.

Reports of the latest potential fine so far haven’t prompted major shifts in the analyst community. Of 16 surveyed this month, 12 rated the stock a “buy” or “strong buy,” and only one rated it “underperform,” according to Yahoo Finance. The company’s Shenzhen-listed shares currently trade at about 37 yuan, well below the average analyst target of 53.54 yuan.

The shares could experience some more turbulence if a new settlement emerges. But politics aside, ZTE must also demonstrate it can make the transition beyond its core carrier business to other areas with better long-term potential. The ByteDance partnership looks like a good step in that direction, along with its booming government and enterprise business.

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