Citi: Slower Growth for Chinese Telecom Stocks in Q3 Already Priced In; Maintains "Buy" Ratings on H-Shares of the Three Major Operators

Citi released a research report stating that slower growth for Chinese telecom stocks in Q3 is already priced in, with focus shifting to AI infrastructure monetization and dividend support. The bank maintains "Buy" ratings on the H-shares of the three major Chinese telecom operators: China Mobile Limited (00941), China Telecom Corporation (00728), and China Unicom (00762). H-shares remain relatively attractive on valuation, with an average dividend yield of approximately 7%. Citi noted that mainland China's telecom industry revenue may remain under pressure in Q3, with industry revenue declining 2.2% year-on-year in the first eight months of 2026, mainly reflecting a VAT-driven reset rather than a comparable deterioration in underlying demand. The bank believes this slowdown is largely priced in, with investor focus shifting to AI infrastructure monetization and dividend support. Despite the decline in total capital expenditure, more than one-third of the operators' 2026 investment is being redirected toward computing infrastructure. The bank estimates that the combined data center capacity of the three major operators could double from 8.7GW in 2024 to a forecast 17.5GW by 2028. Citi believes that with the VAT impact largely reflected, investor focus should shift to ex-VAT trends, ARPU resilience, and cost discipline. On AI infrastructure, operators are reallocating more than one-third of their 2026 capital expenditure to computing infrastructure. The bank expects the combined data center capacity of the three to double from 8.7GW in 2024 to a forecast 17.5GW by 2028, supporting long-term AI infrastructure growth and potential valuation re-rating. On valuation, H-shares remain relatively attractive, with an average dividend yield of approximately 7% and undemanding valuations; A-share dividend yields are less attractive, but the spread against China government bond yields is broadly stable. On individual stocks, the bank lowered its target price for China Mobile Limited H-shares from HK$102 to HK$97, and its target price for China Mobile Limited (600941.SH) A-shares from RMB120 to RMB118, to reflect the compression of effective service revenue from VAT policy adjustments and a more cautious view on AI-driven revenue contribution during the transition period. The target prices for China Telecom Corporation (00728) H-shares and China Telecom Corporation (601728.SH) A-shares were maintained at HK$5.7 and RMB7.7, respectively. The target price for China United Network Communications (00762) H-shares was lowered from HK$8.3 to HK$7, to reflect the impact of the suspension of interim dividends.