Fitch Ratings has upgraded ZTE’s ratings as the company benefits from increased investment in China’s 4G networks and improved margins.
The agency expects ZTE to see steady margins of 5-6 per cent in the next two to three years, driven by higher network sales and rising enterprise network business. Its operating EBIT margin rose to 5.4 per cent last year from 2.7 per cent in 2013.
The vendor reported a 42 per cent increase in Q1 net profit, while operating revenue increased 23 per cent.
The company’s default rating was raised to BB- from B+ and outlook moved to stable.
Its ratings, however, are constrained by its high financial leverage, the highly competitive global telecoms equipment market, ZTE’s weaker position in Europe and stiff competition in the smartphone industry, the agency said.
China’s overall telecoms capex is forecast to increase 5 per cent year-on-year this year. But more importantly, 3G and 4G capex is expected to expand 19 per cent. China will account for an estimated 60 per cent of ZTE’s infrastructure revenue over the next two years.
But since ZTE is highly dependent on China, the company will need to reduce its dependence on the Chinese market before the current 4G cycle peaks, Fitch said.
ZTE’s free cash flow is forecast to remain negative in the next two years due to higher working capital needs and the resumption of cash dividend payments, slowing its deleveraging. At the end of last year, including bank advances on factored trade receivables of CNY4.9 billion ($790 million), ZTE had gross debt of CNY32.1 billion ($5.18 billion).