20211026-招银国际-中兴通讯-00763.HK-Expect_future_share_gain_under_similar_5G_capex_plan_7页_1mb

ZTE (763 HK) Company Update Summary

Core Content

ZTE, a leading Chinese technology company, has released its 3Q21 results, showcasing strong revenue and net profit growth, with revenue increasing by 14.2% and net profit by 107.6% year-over-year. The gross margin (GPM) improved to 38.0%, up from 36.8% in 2Q21 and 29.9% in 3Q20. The company's performance has been further bolstered by the continued deployment of 5G infrastructure, which is expected to drive future share gains.

For the first nine months of 2021, ZTE's revenue and net profit reached 71.6% and 74.3% of the FY21E estimates, respectively. The firm maintains a BUY rating with a target price (TP) of HK$33.06, which is based on a 15.0x FY22E P/E ratio. Currently trading at 11.4x FY22E P/E, the stock is considered attractive.

Main Points

• 3Q21 Financial Performance:

  • Revenue growth of 14.2% YoY
  • Net profit growth of 107.6% YoY
  • GPM improved to 38.0%
  • Operating cash flow was strong, up 189% YoY for 9M2021

• 5G Capex Trends:

  • China has built 993k 5G BTS as of 3Q21
  • Estimated 5G BTS net-additions for 2021: 692k (vs. 588k in 2020)
  • 5G Capex plan for 2022E is expected to remain similar to 2021E
  • ZTE is projected to gain market share in 5G BTS procurement, reaching 35% in 2022E

• Market Share in 5G BTS Tender:

  • 700MHz 5G BTS: 31% share in 2021
  • 2.1GHz 5G BTS: 31.9% base share with additional floating share for top 2 winners (Huawei and ZTE)
  • 3.5GHz 5G BTS: ZTE is believed to have a similar share to 2020 (30% +)

• Earnings Revisions:

  • CMBIS has raised GPM estimates for 2021E–2023E due to self-developed chips and improved operating efficiency
  • Revenue and net profit for FY21E, FY22E, and FY23E remain unchanged
  • EPS for FY21E is estimated at RMB1.70, up from the previous estimate of RMB1.55
  • Gross margin for FY21E is 36.8%, up from 35.7% in the previous estimate

• Valuation:

  • Current TP is HK$33.06 (31.2% upside from current price of HK$25.2)
  • CMBIS expects continued healthy 5G capex deployment in FY22E
  • The stock is undervalued based on its 12M forward P/E ratio
  • Risks include US-China disputes, component restrictions, and potential delays in 5G deployment

Key Financial Metrics

Shareholding and Performance

• Shareholding Structure:

  • BlackRock: 7.09%
  • Capital Group: 5.08%
  • Schroders: 4.93%

• Share Performance (Bloomberg):

  • 1-mth: -5.3% (Absolute), -12.3% (Relative)
  • 3-mth: -3.3% (Absolute), 1.1% (Relative)
  • 6-mth: 24.1% (Absolute), 38.2% (Relative)

• Market Cap: HK$179,608 million

• 52-Week High/Low: HK$31.75 / HK$16.50

• Total Issued Shares: 755.5 million

Financial Highlights

• Operating Cash Flow: Strong, up 189% YoY for 9M2021
• Gross Margin: Continued improvement, up to 38.0% in 3Q21
• Net Profit Margin: Improved to 6.7% in FY21E
• ROE: Increased to 16.7% in FY21E
• Net Debt/Total Equity: Reduced to 42.0% in FY23E

Risks

• US-China Disputes: May impact operations and market access
• Component Restrictions: Could affect supply chain and production
• 5G Deployment Delays: Might impact revenue growth and market share

Analyst Information

• Analysts: Lily Yang, Ph.D and Alex Ng
• Contact Information:
  • Lily Yang: (852) 3916 3716, lilyyang@cmbi.com.hk
  • Alex Ng: (852) 3900 0881, alexng@cmbi.com.hk

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
• NOT RATED: Stock not rated by CMBIS
• 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

Company Overview

ZTE is a subsidiary of China Merchants Bank, with its headquarters located at 45/F, Champion Tower, 3 Garden Road, Hong Kong. The company is engaged in the provision of telecommunications equipment and services, with a strong focus on 5G technology and infrastructure.