20210127-招银国际-中兴通讯-000063.SZ-Solid_4Q20_recovery_with_improving_margin__Lift_TP_to_RMB41.7_5页_1mb

ZTE (000063 CH) Company Update Summary

Core Content

CMB International Securities has released an updated equity research report on ZTE, highlighting its financial performance and future outlook for the company. The report outlines ZTE's performance in FY20, its position in the global 5G market, and revised forecasts for FY21-23. The key focus is on ZTE's ability to recover from previous challenges and capitalize on the "New Infrastructure" initiative and 5G network upgrades, despite ongoing uncertainties related to US-China trade tensions and component restrictions.

Main Points

• FY20 Performance: ZTE reported revenue and net profit growth of 11.7% and -15.3% YoY respectively, largely in line with expectations. The company saw strong performance in all business segments and achieved a record-high operating cash flow of RMB10.23bn, up 37.4% YoY.
• 4Q20 Recovery: Revenue and net profit rose 3% and 62% YoY to RMB27.3bn and RMB1.66bn, respectively, showing improved profitability.
• Improved Financial Metrics: ZTE's gearing ratio improved to 69.5% from 73.1% in FY19, indicating better financial health. The company is expected to continue improving working capital and optimizing its balance sheet structure.
• 5G Market Position: ZTE is a major beneficiary of global 5G deployment, with a projected increase in its 5G market share in China from 30% in FY20 to 35% in FY21. The company expects 9% and 18% CAGR for domestic and overseas carrier network revenue during FY21-23.
• Earnings Forecast: CMBIS has revised its earnings forecast and lifted its target price to RMB41.7, a 22.5% upside from the current price of RMB34.03, based on a 31.2x FY21E P/E ratio. The stock is currently trading at 25.5x FY21E P/E, which is 1 SD below the 2-year average.
• EPS Growth: The report forecasts a 26% CAGR in EPS for FY21-23, supported by a 11% revenue CAGR and improving gross profit margin (GPM) as 5G scales up.
• Valuation and Rating: The report reiterates a BUY rating, suggesting the stock has strong potential for returns over the next 12 months. The valuation is deemed attractive due to the current P/E ratio and the company's strong growth outlook.

Key Information

• Target Price: RMB41.7 (up from RMB41.2)
• Current Price: RMB34.03
• EPS Forecast:
  • FY20E: RMB0.95
  • FY21E: RMB1.34
  • FY22E: RMB1.57
• P/E Ratio:
  • FY20: 35.8x
  • FY21: 25.5x
  • FY22: 21.7x
• P/B Ratio:
  • FY20: 3.6x
  • FY21: 3.3x
  • FY22: 2.9x
• Gearing Ratio:
  • FY19: 73.1%
  • FY20: 69.5%
• Gross Margin:
  • FY18: 32.9%
  • FY20: 32.3%
  • FY21E: 33.6%
  • FY22E: 34.0%
• Operating Margin:
  • FY18: 8.3%
  • FY20: 5.5%
  • FY21E: 7.5%
  • FY22E: 7.7%
• Net Margin:
  • FY18: 5.7%
  • FY20: 4.3%
  • FY21E: 5.4%
  • FY22E: 5.6%
• ROE:
  • FY18: 19.9%
  • FY20: 13.5%
  • FY21E: 14.1%
  • FY22E: 16.7%
• CAGR Projections:
  • Revenue: 11% (FY21-23)
  • EPS: 26% (FY21-23)

Risks

• US-China Disputes: Ongoing tensions could affect ZTE's operations and market access.
• Component Restrictions: Potential restrictions on components could impact production and profitability.
• 5G Deployment Delays: Delays in global 5G rollout could affect revenue growth expectations.

Summary of Analysts

• Alex Ng: (852) 3900 0881 | alexng@cmbi.com.hk
• Lily Yang: (852) 3916 3716 | lilyyang@cmbi.com.hk

Financial Highlights

• Revenue (FY20E): RMB114,048 million
• Net Profit (FY20E): RMB6,176 million
• Operating Profit (FY20E): RMB8,537 million
• Net Cash from Operating (FY20E): RMB13,912 million
• Total Assets (FY20E): RMB180,526 million
• Total Liabilities (FY20E): RMB124,437 million
• Total Equity (FY20E): RMB56,089 million

CMBIS 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

Market Outlook

• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over next 12 months
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark over next 12 months
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark over next 12 months

Company Information

• CMB International Securities Limited
  Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong
  Tel: (852) 3900 0888 | Fax: (852) 3900 0800

Important Disclosures

• CMBIS does not provide individually tailored investment advice.
• This report is for information purposes only and should not be construed as an offer or solicitation to buy or sell any security.
• The information is subject to change and may not be accurate or complete.
• CMBIS may have conflicts of interest and is not liable for any loss or damage incurred from reliance on this report.
• The report is intended for distribution to major US institutional investors and may not be shared with others in the US without prior written consent.
• In Singapore, the report is distributed by CMBI (Singapore) Pte. Limited, an Exempt Financial Adviser.