ZTE released 1H23 results, posting revenue/NP （Rmb60.7bn）/NP （Rmb5.4bn）， growth of 1.5%/19.9% YoY. The top-line growth was muted, mainly due to the slowdown in overseas capex spending and macro pressures. Geographically, domestic sales grew 6.2% YoY, while overseas sales declined by 8.5% YoY. The bottom-line growth was strong, driven by improving GPM （6.18ppts higher than 1H22）， a result of favourable segment mix and cost optimization. We maintain BUY rating and increase TP to HK$29.4, considering potential further share gain on domestic carrier business and higher gross margin.
The growth of domestic carrier sales will outpace overseas. 1） Domestic market: According to China Mobile and China Unicom’s recent tender announcements in the past months, they will procure c.500k and 690k 5G BTS, which was greater-than-expected as the telcos guided only 560k to be added earlier this year. ZTE will continue to be the key beneficiary in domestic telecom markets, with potential share gain, partially offsetting the negative impact from declining 5G-related spending （China telco’s total capex to grow 2% in 2023 with investment focus shifting to computing power areas）。 We still expect ZTE’s non-RAN business, especially the new server/memory/switch products, to drive double-digit growth. 2） Overseas market: We think overseas telecom capex has peaked in 2022, reaching all-time high of US$300bn, driven by resumed 5G buildouts. Looking forward, we are cautious about overseas telecom capex growth, considering plateaued 5G revenue growth and macro pressures.
GPM is expected to remain at current 40%+ level. The Company’s GPM improved to 43.2% in 1H23 from 37.0%/37.3% in 1H/2H22, mainly due to a significant increase in margin in the Carrier segment （54.2% in 1H23 vs. 45.3%/47.1% in 1H/2H22）。 We expect the mgmt. team will continue to improve organizational efficiency and strengthen the Company’s financial performance.
TP was raised to HK$29.4, based on 11.4x （unchanged, close to 3-year avg.） rollover FY24E P/E. We expect ZTE’s revenue to grow 7.6%/8.9% YoY in 2023/24E. We revised down our top-line forecasts by 9%/12%, due to cautious outlook for global telecom spending and soft consumer/corporates spending. We revised up our bottom-line forecasts by 5%/10%, reflecting higher GPM. We raised TP to HK$29.4. We think the stronger growth in earnings justify the 11.4x P/E multiple. Potential risks include China-US trade tensions, additional component restriction/technology ban, and 5G deployment delays.