20210126-招银国际-中兴通讯-00763.HK-Solid_4Q20_recovery_with_improving_margin__Raise_TP_to_HK_28.1_5页_1mb

ZTE (763 HK) Company Update Summary

Core Content

This report provides an equity research update on ZTE (763 HK), focusing on its FY20 performance, outlook for FY21 and FY22, and valuation analysis. It highlights the company's recovery in the fourth quarter of 2020, improved financial metrics, and potential growth in the global 5G market. The report also includes updated target price and investment ratings, as well as key financial data and ratios.

Main Points

FY20 Performance

• Revenue: RMB101.379 billion, up 11.7% YoY, largely in line with estimates.
• Net Profit: RMB4.367 billion, down 15.3% YoY, primarily due to a one-time asset disposal gain in 3Q19.
• 4Q20 Growth: Revenue and net profit increased by 3% and 62% YoY respectively to RMB27.3 billion and RMB1.66 billion.
• Operating Margin: Improved to 5.9% in 4Q20 from 4.1% in 3Q20.
• Net Margin: Increased to 6.1% in 4Q20 from 3.2% in 3Q20.
• Operating Cashflow: Reached a record high of RMB10.23 billion, up 37.4% YoY.
• Gearing Ratio: Improved to 69.5% from 73.1% in FY19.

Business Segments

• All three segments (carrier's network, consumer business, and government/corporate business) showed strong growth.
• ZTE is a major beneficiary of the global 5G deployment, with expectations of a significant increase in 5G BTS net adds in FY21 and FY22.

5G Market Share

• ZTE's 5G market share in China is expected to rise to 35% in FY21E and FY22E, up from 30% in FY20.

Revenue Growth

• Domestic and overseas revenue from carrier's network are expected to grow at 9% and 18% CAGR during FY21-23E, respectively.

Earnings Revision

• CMBIS adjusted its estimates to reflect better operating leverage and new FX assumptions.
• Revenue: Revised upward by 2% in FY20E, 3% in FY21E, and 3% in FY22E.
• Net Profit: Revised upward by 1% in FY20E, 1% in FY21E, and 2% in FY22E.
• EPS: Increased from RMB0.94 in CMBIS estimate to RMB1.34 in FY21E and RMB1.57 in FY22E.

Target Price and Rating

• Target Price: Raised to HK$28.1, reflecting a 17.5x FY21E P/E multiple.
• Current Price: HK$24.0, with a 17.2% upside.
• Rating: Reiterated as BUY, indicating potential return of over 15% over the next 12 months.

Valuation

• The stock is currently trading at 14.9x FY21E P/E, which is 1 standard deviation below the 2-year average.
• The 26% CAGR in EPS from FY21 to FY23 is expected, driven by 11% revenue CAGR and improving gross profit margin (GPM).

Share Performance

• 1-month: +21.3%
• 3-months: +19.4%
• 6-months: +0.2%
• 12-months: Price performance is shown in the chart, but not detailed numerically.

Shareholding Structure

• BlackRock: 5.93%
• Capital Group: 5.08%
• Schroders: 4.93%

Financial Summary

• Revenue: Expected to grow from RMB101.379 billion in FY20E to RMB129.118 billion in FY22E.
• Gross Profit: Projected to increase from RMB32.742 billion in FY20E to RMB43.913 billion in FY22E.
• Operating Profit: Expected to rise from RMB5.537 billion in FY20E to RMB9.97 billion in FY22E.
• Net Profit to Shareholders: Forecasted to increase from RMB4.367 billion in FY20E to RMB7.239 billion in FY22E.

Key Ratios

• Gross Margin: Expected to increase from 32.3% in FY20E to 34.0% in FY22E.
• Operating Margin: Projected to rise from 5.5% in FY20E to 7.7% in FY22E.
• Net Profit Margin: Expected to increase from 4.3% in FY20E to 5.6% in FY22E.
• Gearing Ratio: Expected to decrease to 37% in FY22E.
• ROE: Projected to increase from 13.5% in FY20E to 16.7% in FY22E.
• ROA: Expected to rise from 3.5% in FY20E to 5.4% in FY22E.

Risks

• US-China Disputes: Potential impact on business operations and market access.
• Component Restrictions: May affect production and supply chain.
• Overseas 5G Deployment Delays: Could impact revenue growth.

Analysts

• Alex Ng and Lily Yang from CMB International Securities are the primary analysts.

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.
• 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.

Disclosures

• The report is not investment advice and is not guaranteed to be accurate or complete.
• CMBIS is not a registered broker-dealer in the US and may have conflicts of interest.
• The report is intended for specific investors and may not be distributed to others without consent.