ZTE’s 3Q earnings increased by 27% YoY, beating our estimate by 2.5% and also ahead of street consensus, despite slower consumer product sales in our view. We view the share attractive trading at 7.8x 2022E earnings based on the closing price on 26 October 2022, and expect market rerating as the earnings visibility improves. Reiterate BUY and lower target price from HK$21.71 to HK$20.51 as we price in the CNY depreciation to HKD with revised up 2022-24E earnings.
Key Factors for Rating
3Q22 net profit increased by 27% YoY to RMB2.25bn, beating BOCI estimate by 2.5% and ahead of street estimates.
Total revenues increased by 6.5% YoY to RMB32.7bn, 6.4% lower than our estimate, attributable to slower sales growth in consumer products, while gross profit increased by 6.8% YoY to RMB12.5bn, 1% higher than our estimate.
Higher growth in carrier network equipment as well as enterprise/government system sales resulted in improved gross margin.
Operating cashflow for 9M22 declined by 66.7% YoY to RMB3.7bn, largely due to rising cash expenses from product purchasing as well as payment for services received. Forex gain booked in 3Q22 was RMB355m, compared with loss of RMB186m for the same period in 2021.
Key Risks for Rating
US sanction on Chinese tech sector might cause unexpected production disruption.
Valuation
We reiterate BUY and lower target price from HK$21.71 to HK$20.51 as we updated our CNY to HKD exchange rate. We also revised up our 2022-24E earnings by 3.1%, 1.8% and 0.2% as we fine tuned our sales and margin assumptions on the company’s carrier network, consumer products and enterprise solution. Our target P/E multiple remains as the mean of historical P/E trading range at 10.8x.