Decent 1H22 results
? ZTE reported its 1H22 results earlier; both top-line and bottom-line yoy growth were in line.
? Apart from telecommunications equipment, we maintain the view that ZTE will benefit from gaining market share in ICT products.
? Its gross profit margin in 1H22 was better than we expected, mainly because the increased profitability of 5G products.
? We raised our net profit forecasts slightly after factoring in higher profitability.
? We reiterate our ADD rating, with a lower target price of HK$28.98 (based on 15x 2022F P/E, unchanged, and factoring in recent HKD/RMB movement).
1H22 results highlights
ZTE’s 1H22 operating revenue was Rmb59,818m, up 12.7% yoy, generally in line with our expectation of 14.0% yoy for full-year 2021. Its gross profit margin (GPM) increased by 0.9ppt yoy to 37.04% for 1H22, better than our expectation of 35.01% for full-year 2022, which was attributable mainly to growth in its GPM for carrier networks. R&D expenditure increased 14.6% yoy from Rmb10,152m in 1H22, accounting for 16.97% of total operating revenue, in our view, indicating that the Company has continued to invest in new business opportunities, especially applications based on 5G technology and ICT products. ZTE’s 1H22 net profit was Rmb4,566m, up 11.95% yoy from Rmb4,079m in 1H21. By segment, a) operating revenue for carrier networks was Rmb38,721m, up 10.47% yoy; b) operating revenue for government and corporate business was Rmb6,705m, up 18.3% yoy; and c) operating revenue for its consumer business was Rmb14,392m, up 16.5% yoy. Carrier networks remained the key top-line contributor. The decent yoy growth in 1H22 was driven mainly by telecom operators’ investment in fixed-line networks, core networks and server products. The GPM of its carrier network segment improved by 2.5ppts yoy to 45.31% in 1H22, which offset the yoy decline in the GPM of both the enterprise & government (down 0.74ppt yoy) and consumer (down 1.53ppts yoy) segments. ZTE reported 18.9% yoy growth in revenue and 23.8% yoy growth in net profit in 2Q22, which indicates that the lockdowns didn’t have any impact on the Company’s operations.
We maintain the view that telecom operators’ CAPEX should remain stable in 2022 (lowsingle-digit yoy growth) and that ZTE will benefit from the continued 5G network roll-out. We still expect ZTE to deliver decent revenue growth in 2022F (faster than telecom operators’ 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
improvements 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.
Reiterate ADD with a lower target price
We revised up our 2022–2023F net profit forecasts by 0.2% and 0.03%, respectively, after our 1H22 results adjustment. We factored in better profitability for 5G products, which will partly offset higher R&D expenses, which are intended to drive future growth. We reiterate our ADD rating, with a lower target price of HK$28.98, based on 15x 2022F P/E (unchanged). The downward revision is due to factoring in recent HKD/RMB movement).