ZTE CORP(763.HK)：EVOLVING INTO AN AI INFRASTRUCTURE POWER HOUSE-格隆汇

机构：中银国际
研究员：Michael MENG/Constance ZHANG

　　2H earnings missed our expectation due to worsening revenue mix while we expect to see carrier’s business to recover from 2025. We expect the Company to capture the rising cloud infrastructure demand from wide ranging AI applications across industry verticals. The launch of AI Servers with domestic chipset will become a critical driver for the company’s earnings growth, which will contribute to both their carrier networking equipment and government & enterprise product sales.
　　Reiterate BUY and increased target price from HK$22.22 to HK$29.28 based on 15.19x of the Company’s 2025 earnings, which we derived from their A-share peers (average 26.2x 2025 earnings) with 58% discount applied based on 5 year A-H trading range.
　　Key Factors for Rating
　　ZTE launched their AICube (训推一体机) incorporating DeepSeek R1 model and Hegang Digital ( 河钢数字 ) LLM that tailored for steel production industry.
　　Thanks to the extended industrial application of LLM based applications, we expect the Company’s router and server products sales to accelerate in 2025 onwards, which will make up for the slowdown in traditional telecom spending.
　　Group’s revenue decreased by 2.4% YoY to RMB121.3bn in 2024, implying a 7.5% YoY decline in 2H24 and 10.3% YoY decline in 4Q24, weaker than our expectation, mainly dragged by carriers’ shrinkage in investments in domestic market while partially offsetting the solid growth in government & corporate and consumer businesses. As of the end of 2024, revenue contribution from carriers, government & corporate, and consumer accounted for 58%, 15.3% and 26.7% respectively.
　　We revised down 2024-25 estimated sales by 8.6% and 11.3%, while earnings were reduced by 15.7-14.7% as we factor in worsening CAPEX impact from reduction in traditional telecom equipment sales.
　　Key Risks for Rating
　　Supply chain disruption and shortage of key components and semiconductor products are the primary uncertainties on the company’s earnings. China market contributes over 70% of the Company’s sales, and the fluctuation of local economy might have negative impacts on the Company’s sales and earnings.
　　Valuation
　　Reiterate BUY and increased target price from HK$22.22 to HK$29.28 based on 15.19x of the Company’s 2025 earnings, which we derived from their A-share peers (average 26.2x 2025 earnings) with 58% discount applied based on 5 year A-H trading range.