Fitch Affirms ZTE's Debt Ratings; Withdraws Ratings

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Published on: 3rd Nov 2015
Fitch Ratings has affirmed China based ZTE's Long Term Foreign and Local Currency debt ratings at 'BB '. The Outlooks are Stable.
The agency has simultaneously withdrawn all the ratings.
Fitch said that the ratings have been withdrawn as they are no longer considered by Fitch to be relevant to the agency's coverage because ZTE has no international public bonds outstanding and is no longer considered essential for its peer analysis or sector commentary.
China's 4G Investment
Fitch continues to believe that substantial 4G capex in China will be an opportunity for ZTE to repair its financial profile. We expect ZTE's stronger market position in China will allow it to take advantage of investments in 4G by Chinese telecoms operators in the next two to three years. However, ZTE is very dependent on China and the rating reflects that the company may need to reduce its dependence on Chinese telecoms capex before the current 4G cycle peaks to maintain a robust credit profile over the longer term.
Improving Financial Profile
Fitch expects ZTE to see steady margins in the next two years, driven by higher network sales and steadily rising enterprise network business. ZTE has already benefited from increased 4G investment in China, with its operating EBIT margin (including value-added tax refunds and subsidies) improving to 8.3% in 1H15 from 7.8% in 1H14, and debt/operating EBITDA decreasing to 4.4x from 5.7x over the same period.
Volatile Cash Conversion
High volatility in cash conversion will remain a constraint on ZTE's ratings. While ZTE's operating cash flow is likely to improve in 2015 and 2016, Fitch expects its cash conversion will remain weak, due to higher working capital requirements stemming from more China 4G projects. They expect ZTE to see more meaningful improvement in cash conversion in 2017 or 2018 when the 4G capex cycle peaks and sales collection following project completions starts to exceed working capital needs for new projects.
High Leverage
Fitch expects ZTE's free cash flow (FCF) to remain negative in the next two years due to higher working capital needs and the resumption of cash dividend payment, which will slow ZTE's deleveraging. The ratings agency also expects ZTE's FFO-adjusted leverage to stay above 4.0x in the next two years before sales collection accelerates significantly to drive strong operating cash flow generation. ZTE had gross debt of CNY31.7bn at end-June 2015, including CNY3.7bn of bank advances on factored trade receivables and CNY7.5bn of medium-term notes.

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