CCB International: Lowering the target price of ZTE Corporation (00763) to HKD 38, expected transformation to show results next year.

CCB International released a research report stating that due to the more conservative sales of ZTE Corporation's (00763) operator business and the profit pressure brought by changes in product structure, the group's profit forecast for 2025-2027 was reduced by 23%/7%/7% respectively. The valuation benchmark was updated to 2026, with the H-share target price lowered by 5% from HK$40 to HK$38, maintaining an "outperform" rating. The bank believes that ZTE Corporation is currently in a critical stage of transformation into a provider of network, cloud, and computing infrastructure, with gradual effectiveness expected to be seen from 2026 onwards. The report stated that the capital expenditure budget of the three major domestic telecommunications companies in 2025 is expected to decrease by 9% compared to the previous year, but the actual spending is expected to further contract. In terms of overseas market expansion, ZTE Corporation has established a significant presence in emerging markets such as Southeast Asia, Latin America, and Africa. The bank believes that it will continue to benefit from the 4G upgrade and initial deployment of 5G in these regions. The bank now expects ZTE Corporation's operator network sales to decrease by 12% in 2025 and to grow by 5% in 2026. In terms of government and corporate (G&C) business, the bank believes that the demand for computation from domestic internet companies will remain strong for the remainder of this year and in 2026. It is now projected that G&C business revenue will increase by 134% in 2025 and by 14% in 2026. With the expansion of scale and the increase in the use of self-developed chips, gross profit margin is expected to improve.