ZTE Gets Positive Outlook from Debt Ratings Agency

Debt ratings agency, Fitch has assigned a Positive Outlook to ZTE's Long-term foreign and local currency Issuer Default Ratings (IDRs), and affirmed them at 'BB+'. Fitch said that the Positive Outlook reflects the company's increased revenue scale driven by strong growth, positive free cash flow generation in 2008 and lower financial leverage.

Fitch added that an upgrade of ZTE's ratings to investment grade (one notch above BB+) will depend on its ability to continue to generate positive free cash flow in 2009 and maintain stable margins.

"ZTE's sector exposure to the global telecom equipment market, and particularly its favourable position in China, has enabled the company to record continuous strong revenue growth and maintain stable EBITDA margins, notwithstanding the negative impact of the global economic crisis," says Jinqing Li, Associate Director in Fitch's Corporates team.

Backed by ZTE's strong performance in the Chinese 3G sector to date, Mr. Li also says that Fitch expects the company to register revenue growth of above 20% in 2009, despite the possibility of it facing more pressure in overseas markets.

Although intense competition in the telecom equipment market has caused most of its competitors' margins to decline significantly in recent years, ZTE has successfully been able to maintain a stable EBITDA margin of 7.6% to 7.7% over the past three years. Moreover, despite the fact that its margins remain lower than that of its major peers, Fitch believes the company will be able to sustain the same at current levels in light of its substantially lower R&D and production costs relative to its international competitors. In the long run, Fitch believes ZTE should be able to improve its margins as the company gains more upgrade/expansion contracts.

ZTE generated positive free cash flow generation in 2008, for the first time since 2005. The strong cash generation was partially driven by ZTE's significantly lower investment in working capital, which declined to CNY480m in 2008 from CNY3.2bn in 2007. One explanation for ZTE's better management of working capital is related to the strong financing support it receives from the Chinese banks. Although Fitch expects such support to continue in the future, Fitch will monitor closely whether this lower working capital requirement is sustainable over a longer period time, given the current economic turmoil and continuous intense competition in the telecom equipment market.

Financial leverage, as measured by total adjusted debt net of cash to operating EBITDAR, fell significantly to 0.5x in 2008 from 1.1x in 2007, driven by ZTE's strong cash generation. Although outstanding debt increased by 61.4% to around CNY10.5bn in 2008, ZTE regained a net cash position of CNY873m with unrestricted CNY11.3bn cash on hand.

Posted to the site on 3rd July 2009