ZTE (763 HK) Summary
Core Content
ZTE has reported its first-half of 2026 (1H26) financial results, showing a revenue increase of 9.1% year-over-year (YoY) to RMB78.0 billion, while net profit dropped by 45.6% YoY to RMB2.75 billion. In the second quarter (2Q26), revenue increased by 11.5% YoY and 23.0% quarter-over-quarter (QoQ) to RMB43.0 billion, exceeding Bloomberg's consensus. However, net profit decreased by 44.6% YoY but rose by 10.1% QoQ to RMB1.44 billion.
Main Points
- Computing Growth: Computing revenue grew over 55% YoY, accounting for 35.1% of total sales. Server and storage revenue increased nearly 60%, while datacenter sales grew over 90%.
- Margin Pressure: Gross Margin Percentage (GPM) fell 7.0 percentage points (ppts) YoY to 25.5%, mainly due to lower carrier revenue and a shift towards lower-margin E&G sales. Segment GPM also declined sharply by 14.9 ppts YoY to 38.1%.
- Revenue Mix: Carrier revenue decreased 9.4% YoY to RMB31.8 billion, representing 40.7% of total sales, down from 49.0% in 1H25. Domestic 5G investment remained weak, while overseas carrier markets showed growth.
- Overseas Markets: Overseas revenue increased 33.1% YoY to RMB27.9 billion, accounting for 35.7% of total sales. Asia excluding China saw 53.4% YoY growth, Africa 48.6%, and Europe, the Americas, and Oceania 10.9%.
- Future Outlook: ZTE is expected to benefit from AI server and datacenter sales, driven by robust overseas demand. However, weak domestic telco spending and a changing revenue mix will likely keep margins under pressure.
- Target Price (TP): The TP has been adjusted to HK$35.5, based on a 22x 2027E P/E, which is broadly in line with peers. The previous TP was HK$38.6 based on a 25x 2026E P/E.
- Earnings Forecast: Revenue is forecasted to grow by 11.4% in FY26E, 14.3% in FY27E, and 12.0% in FY28E. Gross margin is expected to decline to 24.7% in FY28E, while net margin is forecasted to be 3.8%.
- Stock Performance: ZTE's share price has had a mixed performance, with a 1-month decline of -2.2%, a 3-month decline of 0.3%, and a 6-month decline of -11.7%.
- Shareholding Structure: Major shareholders include BlackRock (5.9%) and Capital Group (5.7%).
Key Information
- Revenue Growth: 1H26 revenue grew 9.1% YoY, with 2Q26 showing a 23.0% QoQ increase.
- Net Profit Decline: Net profit fell 45.6% YoY to RMB2.75 billion, but increased 10.1% QoQ to RMB1.44 billion.
- GPM Decline: GPM dropped 7.0 ppts YoY to 25.5%, with a segment GPM decline of 14.9 ppts YoY to 38.1%.
- Overseas Revenue: Overseas revenue grew 33.1% YoY to RMB27.9 billion, with growth in Asia excluding China, Africa, and other regions.
- Target Price: Adjusted to HK$35.5, reflecting a 22x 2027E P/E.
- Analyst Rating: Maintain BUY, indicating potential return of over 15% over the next 12 months.
- Share Performance: Share price has declined over the past 6 months, with a 12-month price performance shown in the provided image.
Financial Summary
Income Statement
| Metric |
FY23A |
FY24A |
FY25A |
FY26E |
FY27E |
FY28E |
| Revenue (RMB mn) |
124,251 |
121,299 |
133,895 |
149,219 |
170,586 |
190,994 |
| YoY Growth (%) |
1.1% |
(2.4)% |
10.4% |
11.4% |
14.3% |
12.0% |
| Gross Profit (RMB mn) |
51,601 |
45,988 |
40,504 |
38,092 |
42,514 |
47,225 |
| Net Profit (RMB mn) |
9,326 |
8,425 |
5,618 |
6,508 |
6,793 |
7,199 |
Balance Sheet
| Metric |
FY23A |
FY24A |
FY25A |
FY26E |
FY27E |
FY28E |
| Total Assets (RMB mn) |
200,958 |
207,323 |
217,739 |
225,231 |
203,504 |
242,100 |
| Total Liabilities (RMB mn) |
132,627 |
134,213 |
142,098 |
144,982 |
118,672 |
152,372 |
| Total Equity (RMB mn) |
68,008 |
72,808 |
75,426 |
79,968 |
84,483 |
89,305 |
Cash Flow
| Metric |
FY23A |
FY24A |
FY25A |
FY26E |
FY27E |
FY28E |
| Net Cash from Operations |
17,406 |
11,480 |
3,919 |
25,932 |
9,581 |
12,891 |
| Net Cash from Investing |
(21,536) |
(29,193) |
(7,451) |
(6,896) |
(801) |
(15,119) |
| Net Cash from Financing |
7,372 |
(5,818) |
530 |
(28,053) |
(11,835) |
(3,706) |
| Cash at the End of Year (RMB mn) |
51,013 |
28,027 |
25,482 |
16,465 |
13,409 |
7,475 |
Profitability
| Metric |
FY23A |
FY24A |
FY25A |
FY26E |
FY27E |
FY28E |
| Gross Margin (%) |
41.5% |
37.9% |
30.3% |
25.5% |
24.9% |
24.7% |
| Operating Margin (%) |
8.8% |
8.5% |
4.6% |
5.3% |
4.9% |
4.9% |
| ROE (%) |
14.7% |
12.0% |
7.6% |
8.4% |
8.3% |
8.3% |
Key Risks
- Weak domestic telecom capital expenditures (capex)
- AI infrastructure capex slowdown
- Unfavorable revenue mix
Peer Comparison
| Company |
Ticker |
Mkt Cap (US$mn) |
P/E (x) |
EPS (US$) |
GPM (%) |
| IEIT Systems |
000977 CH |
12,658 |
23.3 |
0.37 |
6.5 |
| Huaqin Tech |
603296 CH |
17,441 |
21.5 |
0.54 |
8.1 |
| Fiberhome |
600498 CH |
8,223 |
27.0 |
0.22 |
26.1 |
| Ruijie Network |
301165 CH |
9,807 |
45.2 |
0.27 |
33.5 |
| Average |
- |
- |
29.3 |
- |
18.6 |
Analyst Certification
The research analyst certifies that all views expressed accurately reflect his or her personal views and that no part of his or her compensation is related to the specific views expressed in this report.
CMBIGM Ratings
- BUY: Stock with potential return of over 15% over next 12 months
- HOLD: Stock with potential return of +15% to -10% over next 12 months
- SELL: Stock with potential loss of over 10% over next 12 months
- NOT RATED: Stock not rated by CMBIGM
- OUTPERFORM: Industry expected to outperform the relevant broad market benchmark
- MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark
- UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark
Important Disclosures
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- Past performance is not indicative of future performance.
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