Takeaways From Analyst Briefing
ZTE expects stable growth in its carrier network business, with market share gains and new infrastructure to more than offset the moderating domestic 5G capex. Management also sees opportunities from emerging businesses such as digitalisation, energy management, smartphones, auto electronics, and expects a 40% annual growth in the next few years. Maintain BUY and raise target price to HK$28.40.
• New infrastructure investments the key growth driver for domestic carrier network. Domestic telcos’ investment towards new infrastructure (eg optical transmission networks, routers, servers) will see strong growth going forward given the increasing demand for digitalisation and connectivity, although this will likely be largely offset by a gradual decline in 5G network investments.
Nevertheless, we still expect ZTE Corporation’s (ZTE) carrier network business to register high single-digit/low-teens growth in the next three years, as growth will be mainly driven by: a) market share gains, as ZTE is expected to gain market share in both new infrastructure market and carrier network market, and b) the overseas carrier network is expected to accelerate in 2023-24 as developing countries have released more 5G tenders recently
• Government and Corporate (G&C) business’ growth to reaccelerate gradually. The G&C business grew 18% yoy in 1H22, of which China grew >20% yoy, which is slightly below our estimates of a 30% yoy growth. The lower-than-expected growth was primarily due to corporates employing more stringent cost controls amid the growing macro uncertainties, although the impact is still limited as demand from key industries of the G&C business such as Internet and finance remained resilient. ZTE remains optimistic on the G&C business and expects demand growth to recover on the back of the digitalisation trend. The company will continue to invest into Internet and finance, and it is looking to increase investments into energy and transportation.
• Consumer business driven by both smartphones and home terminals. The strong growth in consumer business in 1H22 was more driven by the robust home terminal business (60% of the segment’s revenue). However, its smartphone business also registered strong growth in the overseas market (25-30% of segment revenue) with sales jumping 40% yoy in 1H22, primarily thanks to share gains on the back of improvements in product quality and expansion in distribution channels.