20171019-交银国际证券-中兴通讯-00763.HK-Hype_vs._reality__we_believe_market_expectations_of_5G_profitability_are_too_high_4页_890kb

ZTE (763.HK) Summary

Core Content

ZTE (763.HK) is a leading Chinese technology company that provides networking equipment, smartphones, and IT hardware solutions. The company is listed on both the Hong Kong Exchange and the Shenzhen Stock Exchange. The report discusses ZTE's financial performance, market expectations, and valuation analysis.

Financial Highlights

• Revenue (RMB m):
  • 2015: 100,186
  • 2016: 101,233
  • 2017E: 111,200
  • 2018E: 120,090
  • 2019E: 132,053
• YoY growth (%):
  • 2015: 23
  • 2016: 1
  • 2017E: 10
  • 2018E: 8
  • 2019E: 10
• Net profit (RMB m):
  • 2015: 3,208
  • 2016: (2,357)
  • 2017E: 5,729
  • 2018E: 5,048
  • 2019E: 6,013
• EPS (RMB):
  • 2015: 0.78
  • 2016: (0.57)
  • 2017E: 1.38
  • 2018E: 1.22
  • 2019E: 1.45
• P/E (x):
  • 2015: 32.5
  • 2016: (44.4)
  • 2017E: 16.5
  • 2018E: 20.8
  • 2019E: 17.5
• P/B (x):
  • 2015: 3.6
  • 2016: 4.0
  • 2017E: 3.6
  • 2018E: 3.3
  • 2019E: 3.1
• Dividend yield (%):
  • 2015: 0.8
  • 2016: 0.0
  • 2017E: 1.6
  • 2018E: 1.2
  • 2019E: 1.5

Key Financial Performance

• ZTE reported preliminary 9M17 results with revenue growing by 7% YoY to RMB76.6bn.
• Gross Margin (GPM) remained stable at 31.6%.
• Net profit increased by 37% YoY to RMB3.9bn.
• However, 3Q17 revenue declined by 5% YoY and 20% QoQ to RMB22.6bn.
• Net profit in 3Q17 was boosted by a one-time gain from the sale of Nubia stake (RMB426m), which would have resulted in a largely flat core net profit of RMB1.2bn.
• For the full year, ZTE expects net profit of RMB4.3bn–4.8bn, slightly below Street estimates of RMB4.9bn.
• The company's shares are currently trading at a P/E ratio of 21.5x/19.7x for 2017E/2018E, which is around 2 S.D. above its historical average.

Target Price and Recommendation

• Target Price: HK$24.00 (up from HK$20.00)
• Valuation Basis: 17x 2018E P/E, 1 S.D. above historical average
• Recommendation: Downgrade to SELL
• Reason: The report suggests that the market's expectations of ZTE's 5G profitability are too high and too fast. It believes the 5G cycle in China will be slower and more gradual than the 4G cycle, leading to cash-flow pressures for telcos if capex increases significantly without a corresponding rise in blended ARPU.

5G Outlook

• The report argues that the China 5G cycle is expected to be much longer than the 4G cycle (perhaps a decade-long cycle).
• Unlike 4G, which rapidly replaced 3G, the report anticipates that 4G and 5G will coexist for many years.
• The China Academy of Information and Communications Technology (CAICT) forecasts 44m/117m/227m 5G users in China by 2021/22/23, implying a penetration rate of 3%/7%/14%, significantly lower than the 4G adoption rate of 8%/33%/57% in 2014/15/16.
• The report believes that without a significant rise in blended ARPU, increased capex will lead to cash-flow pressure for Chinese telcos.

Stock Data

• 52-week high (HK$): 31.10
• 52-week low (HK$): 10.40
• Market cap (HK$ m): 146,073.45
• Issued shares (m): 4,184.63
• Avg daily vol (m): 14.81
• 1-month change (%): 31.11
• YTD change (%): 118.84
• 50-day MA (HK$): 22.81
• 200-day MA (HK$): 17.00
• 14-day RSI: 65.0

Analyst Certification and Disclosure

• The report is authored by analysts at BOCOM International, and the views expressed reflect their personal opinions.
• No part of the analysts' compensation is directly or indirectly related to the recommendations in the report.
• The analysts have not traded in the stock covered in the report within 30 days prior to its release.
• The report includes disclosures about relevant business relationships, such as investment banking relationships with various companies and holdings in equity securities of some of these entities.

Disclaimer

• The report is confidential and intended for private circulation only.
• It is not an offer or recommendation to buy or sell any securities.
• The views and recommendations in the report may change without notice.
• Investors are advised to consult their own financial advisers and make independent evaluations before making any investment decisions.