Shares in optical device makers plunged Monday after the U.S. Commerce Department banned domestic firms from selling components to Chinese telecom gear maker ZTE following a probe into illegally shipped equipment to Iran and North Korea.
Acacia Communications (ACIA) lost more than a third of its value, cratering nearly 36% to close at 25.63, while Oclaro (OCLR) plummeted 15.2% to 7.99 on the stock market today. Inphi (IPHI) sank 6% to 30.795, Lumentum Holding (LITE) plunged 9.1% to 58.48, Finisar (FNSR) fell more than 4% to 15.62, and NeoPhotonics (NPTN) dropped 4% to 6.52.
According to a Raymond James report, Acacia garners 30% of sales from ZTE and Oclaro 14%. Lumentum, Finisar and NeoPhotonics get 2% to 3% of sales from ZTE, said the Raymond James report. A William Blair report, however, puts Lumentum’s sales to ZTE in a range of 5%-10%, with Oclaro at 17.5% of 2017 revenue.
“Perhaps there were other or bigger reasons behind the seven-year ban but the new actions seem harsh at first blush, hurting equally the U.S. component companies betting on strong growth
in China,” said Dmitry Netis, a William Blair analyst in a report. “New sanctions likely meant to get the point across to the Chinese company to follow up fully on its promise after the initial fines were paid out and management changes executed upon.”
Probed in 2016
The commerce department initially probed ZTE’s sales to Iran in 2016. The Chinese gear maker pleaded guilty last year in federal court in Texas for conspiring to violate U.S. sanctions to Iran.
ZTE paid $890 million in fines and penalties and agreed to take other steps but has not followed through, the commerce department said. The commerce department issued new sanctions after it determined that ZTE has violated terms of its 2017 settlement agreement with the agency. U.S. companies could be banned from selling components to ZTE for up to seven years.
Trade tensions with China have been rising, with the Trump administration threatening to impose tariffs on Chinese imports. ZTE is the second biggest Chinese maker of telecom gear behind Huawei. The U.S. government has told U.S. wireless firm not to buy Huawei gear, citing concerns over national security.
“ZTE made false statements to the U.S. government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” Commerce Secretary Wilbur Ross said in a written statement. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”
The department’s so-called Entity List requires that U.S. and foreign companies doing business with those on the list first obtain a license.
The ZTE ban is the latest China-related problem for optical device makers. NeoPhotonics, Oclaro, Acacia, Lumentum, and Finisar sell the most optical components to China, according to a UBS report.
Lumentum, Oclaro, Finisar and other makers of optical components have been slammed by a slowdown in telecom-related orders in China. Analysts had been expecting a rebound in 2018, spurred by spending on fiber-optic networks, 5G wireless and data centers designed for cloud-computing services.
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