ZTE (the "Company") announced its preliminary results announcement for the year ended 31 December 2021. The Company expects that the shareholders’ net profit for FY21 will increase by 52.6%-69.0% yoy to RMB6.5 billion-RMB7.2 billion, while the basic earnings per share will increase by 52.2%-68.5% yoy to RMB1.40-RMB1.55.
We expect the Company's three main business lines to all maintain strong growth. As at the end of 2021, China has already built 1.425 million 5G base stations and we believe the number will keep on growing in the coming years in the context of 5G transformation, which requires considerable amounts of investment on relevant network equipment and therefore is beneficial to ZTE’s carriers'networks business. The Company is also making endeavors in government and corporate business by strengthening its competitiveness on core IT products like servers, storage and database. For consumer business, ZTE will continue investing in branding, products and channels despite the components shortage.
We expect gross margin to improve in FY22. With the deferred revenues being recognized gradually in 2022, given the more and more mature 5G market, we believe the overall gross margin will still be stable and strong.
We revise down TP from HK$32.50 to HK$30.00 and maintain the investment rating as "Buy". We revise down FY21 EPS forecasts by 7.7%. The TP represents 16.7x, 14.1x and 12.9x FY21-FY23 PER.