20210831-招银国际-中兴通讯-00763.HK-Solid_1H_results_with_strong_OCF_6页_1mb

ZTE (763 HK) Equity Research Summary

Core Content

ZTE (763 HK) released its 1H21 financial results, showcasing strong performance with revenue and net profit growth of 12.4% and 119.6% YoY, respectively. Gross profit margin (GPM) continued to improve, reaching 36.1% in 1H21, up from 31.6% in FY20. The company's results accounted for 49% and 57% of the FY21E estimates for revenue and net profit, respectively. Analysts from CMB International Securities (CMBIS) remain positive on ZTE, citing its potential to benefit from the global 5G deployment.

Key Highlights

• 5G Deployment: Despite a delay in 1H21, Chinese telcos have not altered their full-year 2021 capital expenditure (capex) plans. Approximately 46% of CM/CU/CT capex budget was completed in 1H21. Analysts expect an acceleration of 5G deployment in 2H21E, with ZTE expected to win over 35% of the total bid in the previous 2.1G 5G BTS tender.
• GPM Improvement: The improvement in GPM is attributed to the adoption of self-developed chips and enhanced operating efficiency. ZTE reported a 36.8% GPM in 2Q21, up from 28.5% in 2Q20 and 35.4% in 1Q21. CMBIS has raised its GPM forecast to 35.8% and 36.0% for FY22E and FY23E, respectively.
• Strong Cash Position: Operating cash flow for 1H21 reached RMB70.3bn, surpassing net profit of RMB40.8bn. This indicates a robust cash position, with a 244% YoY increase in cash reserves. The analysts expect ZTE to continue strengthening its cash position and cash flow quality.
• Earnings Revisions: CMBIS has revised up its FY21-23E EPS estimates by 9-19% due to improved margins. The target price (TP) has been raised to HK$33.06, reflecting a 15x FY22E P/E multiple, down from the previous 17.4x due to sector valuation compression. The current stock price is HK$26.0, offering a 27.2% upside to the new TP.
• Valuation: The stock is currently trading at 11.8x FY21E P/E, which the analysts consider attractive. The 12M forward P/E chart and band show the stock's valuation trends.

Key Financial Metrics

Analyst Ratings

• BUY: ZTE is expected to deliver a return of over 15% over the next 12 months.
• HOLD: Indicates a return of +15% to -10% over the next 12 months.
• SELL: Suggests a potential loss of over 10% over the next 12 months.
• NOT RATED: The stock is not rated by CMBIS.
• OUTPERFORM: The industry is expected to outperform the relevant market benchmark.
• MARKET-PERFORM: The industry is expected to perform in-line with the relevant market benchmark.
• UNDERPERFORM: The industry is expected to underperform the relevant market benchmark.

Risks

• US-China Disputes: Potential trade restrictions and geopolitical tensions could impact ZTE's operations.
• Component Restrictions: Limitations on access to certain components could affect production and margins.
• 5G Deployment Delays: Although delayed in 1H21, the analysts expect acceleration in 2H21E, but any further delays could negatively impact ZTE's performance.

Shareholding and Performance

• Shareholding Structure: Key institutional shareholders include BlackRock (7.05%), Capital Group (5.08%), and Schroders (4.93%).
• Stock Performance: Over the past 12 months, ZTE's stock has shown positive performance, with a 36.2% return over 6 months and 28.6% over 3 months.

Conclusion

CMBIS maintains a BUY rating on ZTE with a revised target price of HK$33.06, reflecting a 27.2% upside from the current price of HK$26.0. The company's strong cash position, improved GPM, and potential to benefit from China's 5G deployment are key drivers of the positive outlook. Analysts believe ZTE will continue to benefit from healthy capex deployment by telcos and could gain market share in upcoming 5G tender rounds. However, risks such as US-China tensions and component restrictions remain.