Outlook remains positive; clarity after upcoming probation hearing a catalyst
? ZTE is expected to deliver solid top- and bottom-line growth, given the acceleration of
the carrier network business.
? Telecom operators’ CAPEX is expected to remain stable in 2022, and ZTE’s growth will
be driven by market share gains and gross profit margin improvement.
? The market is expected to wait for clarity after a probation hearing on 14 Mar 2022; at
this stage, no corporate member has been charged.
? We maintain our net profit forecasts for 2022 and 2023 and introduce forecasts for 2024.
We reiterate our ADD rating, with a lower target price of HK$30.27 (based on 15x 2022F
P/E). The dow nw ard revision in the target price is due mainly to the adoption of a lower
P/E multiple (from 19x to 15x).
Stable environment
Telecom operators’ CAPEX is expected to remain stable in 2022 (low single-digit yoy
growth), and ZTE is expected to benefit from the continuous 5G network roll-out. We still
expect ZTE to deliver decent revenue growth in 2022F (faster than telecom operations’
CAPEX growth), given the change in the competitive landscape and the Company’s
growing market share. We expect ZTE to continue to report a decent gross profit margin
because of enhanced supply chain efficiency and cost control through design improvement
and lower component costs. The carrier network business is expected to achieve a gross
margin of more than 40% in 2022. In addition to telecommunications equipment, ZTE will
benefit from gaining market share in ICT products. ZTE is expected to expand its consumer
and enterprise segments, which will be growth drivers for the Company.
Awaiting clarity after upcoming US probation hearing
The recent share price weakness is due partly to concerns about a potential US lawsuit.
The Company received a US court order to participate in a probation hearing on 14 Mar.
The case is related to a visa fraud case, dated 18 Mar 2021, charged against a former
employee of ZTE; so far, no corporate member of the Company has been charged. At this
stage, w e believe that it is less likely that ZTE will be included in the US Entity List again if
the court finds that ZTE made some mistakes regarding its former employee’s visa. The
market is awaiting clarity after the hearing. This may be a near-term catalyst for ZTE.
2021 results recap
ZTE reported its 2021 results earlier. Its operating revenue w as Rmb114,522m, up 13%
yoy, and net profit was Rmb6,813m, up 60% yoy. The Company’s 2021 net profit w as in
line with mid-point of previous guidance. Its gross profit margin increased by 3.6ppt yoy to
35.2% in 2021. R&D expenditure increased 27.1% yoy to Rmb18,804m in 2021,
accounting for 16.4% of total operating revenue, indicating that the Company continued to
invest in new business opportunities, especially applications based on 5G technology.
Reiterate ADD with a lower target price
We maintain our net profit forecasts for 2022 and 2023 and introduce forecasts for 2024.
We reiterate our ADD rating, w ith a low er target price of HK$30.27 (based on 15x 2022F
P/E). The dow nw ard revision in the target price is due mainly to the adoption of a low er
P/E multiple (from 19x to 15x).