Date of Report: October 22, 2024
Broker: UOB Kay Hian Private Limited
Company Description
ZTE Corporation develops and markets switches, access servers, videoconferencing systems, mobile communication systems, data communication devices, and optical communication devices.
Stock Data
- GICS Sector: Information Technology
- Bloomberg Ticker: 763 HK
- Shares Issued: 4,783 million
- Market Capitalization: HK$100,687 million / US$12,992 million
- 3-Month Average Daily Turnover: US$27.3 million
- 52-Week High/Low: HK$28.30 / HK$13.30
Price Performance
- 1 Month: +33.1%
- 3 Months: +16.8%
- 6 Months: +34.6%
- 1 Year: +2.7%
- Year-to-Date: +20.7%
Major Shareholders
Financial Performance Overview
3Q24 Results
- Revenue: Rmb 27,557 million (down 3.9% YoY, down 13.6% QoQ)
- Gross Profit: Rmb 11,120 million (down 13.2% YoY, down 10.6% QoQ)
- EBIT: Rmb 1,725 million (down 35.5% YoY, down 33.0% QoQ)
- Net Profit: Rmb 2,174 million (down 8.2% YoY, down 27.3% QoQ)
- Margins:
- Gross Profit Margin: 40.4%
- Operating Profit Margin: 6.3%
- Net Profit Margin: 7.9%
Key Financials
| Year Ending December |
2022 |
2023 |
2024F |
2025F |
2026F |
| Net Turnover (Rmbm) |
122,954 |
124,251 |
125,441 |
131,557 |
141,101 |
| EBITDA (Rmbm) |
12,726 |
13,848 |
11,952 |
14,931 |
16,755 |
| Operating Profit (Rmbm) |
8,668 |
9,172 |
8,296 |
10,835 |
12,433 |
| Net Profit (Rmbm) |
8,080 |
9,326 |
9,507 |
10,318 |
11,117 |
| EPS (Fen) |
170.7 |
197.0 |
200.8 |
215.7 |
232.4 |
| PE (x) |
9.1 |
9.9 |
9.7 |
9.0 |
8.4 |
| P/B (x) |
1.5 |
1.6 |
2.2 |
3.4 |
7.8 |
| EV/EBITDA (x) |
7.5 |
6.9 |
8.7 |
8.1 |
8.3 |
| Dividend Yield (%) |
2.4 |
1.9 |
1.9 |
3.1 |
3.3 |
Stock Impact Analysis
- The domestic carrier network business growth remained weak, primarily impacting the weak top-line growth in 3Q24. The sluggish performance is attributed to lower overall capex from domestic telcos, with a shift in investment focus from hardware to software and indoor coverage.
- Despite the domestic challenges, the overseas carrier network business and the government and corporate (G&C) business exhibited solid growth, contributing to ZTE’s resilience.
- Looking ahead, ZTE expects the domestic telco spending to remain weak through 2025, necessitating stringent cost controls to support earnings growth.
Earnings Revision/Risk
- Net profit estimates have been cut by 3.4% for 2024, 9.5% for 2025, and 14.2% for 2026. The adjustments consider lower revenue assumptions for carrier network businesses, margin adjustments for the G&C business, and higher expectations for cost-cutting measures.
Valuation and Recommendation
- The recommendation has been downgraded to “HOLD” with a target price set at HK$19.00, based on a forward PE multiple of 8.0x for 2025F. The downgrade is influenced by recent price movements surpassing target prices and limited visibility on the recovery of domestic telco capex spending.
Conclusion
ZTE Corporation’s performance in 3Q24 highlights the challenges faced in the domestic market while maintaining growth in overseas sectors. Strategic cost controls will be essential for navigating the anticipated weak domestic environment.
