20210318-招银国际-中兴通讯-00763.HK-1Q21_beat_on_solid_revenue_and_better_margin_Reiterate_BUY_6页_1mb

ZTE (763 HK) Company Update Summary

Core Content Overview

ZTE (763 HK) reported in-line FY20 results and a strong 1Q21 earnings guidance, with a mid-point net profit of RMB2.1bn, representing a 34% to 36% of the analyst's and consensus 2021 net profit estimates. Excluding a one-off gain of RMB774mn, the 1Q21 net profit is expected to grow by 70% YoY, driven by solid telco revenue and improved gross profit margin (GPM).

Key Financial Highlights

• Revenue Growth:

  • FY20: 11.8% YoY
  • FY21E: Expected 15.3% YoY growth
  • FY22E: Expected 10.3% YoY growth
  • FY23E: Expected 8.9% YoY growth

• Net Profit Growth:

  • FY20: RMB4,260mn
  • FY21E: RMB6,181mn (+45.6% YoY)
  • FY22E: RMB7,097mn (+14.8% YoY)
  • FY23E: RMB8,903mn (+25.4% YoY)

• EPS Growth:

  • FY20: RMB0.92
  • FY21E: RMB1.34 (+45.1% YoY)
  • FY22E: RMB1.54 (+14.8% YoY)
  • FY23E: RMB1.93 (+25.4% YoY)

• Valuation Metrics:

  • P/E Ratio:
    • FY21E: 13.5x (1 SD below 2-year average)
    • Target Price (TP): HK$28.1 (17.4x FY21E P/E)
    • Current Price: HK$21.8
    • 12-month upside: 29%

• Gross Margin (GPM):

  • FY20: 31.6%
  • FY21E: 33.9% (up 2.3ppt)
  • FY22E: 34.2%
  • FY23E: 34.5%

• Operating Margin (OPM):

  • FY20: 5.4%
  • FY21E: 7.4% (up 2ppt)
  • FY22E: 7.7%
  • FY23E: 8.7%

• Net Margin:

  • FY20: 4.2%
  • FY21E: 5.3% (up 1.1ppt)
  • FY22E: 5.5%
  • FY23E: 6.3%

Key Drivers of Growth

• 5G Deployment in China:

  • ZTE is expected to benefit from the reaccelerated 5G rollout in China.
  • The company's 5G market share in China is projected to increase to 35% in 2021/22 from 31% in 2020.

• Overseas Share Gain:

  • ZTE is expected to gain market share overseas as Huawei faces uncertainties and Nokia continues to lose share.

• Government and Enterprise Segment Growth:

  • Strong growth is anticipated in the government and enterprise business, with revenue expected to increase by 24% in FY21E.

• Cost Management and Self-developed Chips:

  • Improved cost structure and self-developed chips from Sanchip are expected to enhance gross margin.

Revenue Breakdown

• Carriers' Network:

  • FY21E: RMB85,824mn (+16% YoY)
  • FY22E: RMB94,098mn (+10% YoY)
  • FY23E: RMB101,469mn (+7% YoY)

• Consumer Business:

  • FY21E: RMB17,166mn (+6% YoY)
  • FY22E: RMB18,431mn (+7% YoY)
  • FY23E: RMB19,935mn (+7% YoY)

• Government and Enterprise Business:

  • FY21E: RMB14,006mn (+24% YoY)
  • FY22E: RMB16,541mn (+18% YoY)
  • FY23E: RMB19,120mn (+18% YoY)

Upcoming Catalysts

• The third batch of 5G BTS tenders in China is expected to kick off in late March/April.
• Continued 5G deployment in China and resumed network construction overseas.

Risks

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

Analyst Ratings

• Reiterated BUY: Target Price HK$28.1, 28.8% upside from current price.
• Valuation: Attractive given the 13.5x FY21E P/E and expected 20% CAGR in EPS from FY21 to FY23.

Share Performance

• Market Cap: HK$157,140mn
• 3-month average turnover: HK$293mn
• 52-week high/low: HK$29.95 / HK$16.5
• Total Issued Shares: 755.5mn

Shareholding Structure

• BlackRock: 6.21%
• Capital Group: 5.08%
• Schroders: 4.93%

Valuation Bands

• P/E Band: 17.4x FY21E P/E (aligned with 2-year historical average)
• P/B Band: 1.7x (expected to decrease over time)

Financial Summary

• Cash Flow:

  • FY21E: Net cash from operating activities is expected to be RMB5,962mn.
  • Net cash from investing activities is expected to be negative RMB6,146mn.
  • Net cash from financing activities is expected to be RMB12,506mn.

• Balance Sheet:

  • Total assets are projected to increase to RMB177,442mn in FY21E.
  • Total liabilities are expected to reach RMB126,499mn.
  • Shareholders' equity is projected to grow to RMB50,944mn in FY21E.

Key Ratios

• Gearing Ratio: 50% (FY21E)
• Current Ratio: 1.5x (FY21E)
• ROE: Expected to increase to 15.6% in FY23E.
• ROA: Expected to increase to 4.7% in FY23E.

Conclusion

ZTE is positioned to benefit from 5G deployment in China and overseas, as well as growth in the government and enterprise segment. The company's margin recovery and cost efficiency improvements are expected to drive profitability. Despite risks such as US-China tensions and potential delays in 5G rollout, the stock is considered attractive at its current valuation. The analyst reiterates a BUY rating with a target price of HK$28.1, reflecting a 29% upside from the current price.